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DECENTRALIZED EXCHANGE AND FACTOR PAYMENTS: A MULTIPLE-MATCHING APPROACH

Published online by Cambridge University Press:  07 September 2011

Derek Laing ,
Victor E. Li  and
Ping Wang
Derek Laing
Affiliation:
Syracuse University
Victor E. Li*
Affiliation:
Villanova University
Ping Wang
Affiliation:
Washington University in St. Louis and NBER
*
Address correspondence to: Victor Li, Department of Economics, Villanova University, Villanova, PA 19406, USA; e-mail: [email protected].
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Abstract

The emergence of fiat money is studied in a multiple-matching environment in which exchange is organized around trading posts and prices are determined with a dynamic monopolistically competitive framework. Each household consumes a bundle of commodities and has a preference for consumption variety. We determine the endogenous organization of exchange between firms and shoppers, the means of factor payment (remuneration), and the prices at which these trades occur. We verify that the endogenous linkage of factor payments with the medium of exchange can lead to a monetary equilibrium outcome where only fiat money trades for goods, an ex ante feature of cash-in-advance models. We also examine the long-run effects of money growth on equilibrium exchange patterns. A key finding, consistent with documented hyperinflationary episodes, is that a sufficiently rapid expansion of the money supply leads to the gradual emergence of barter, where sellers accept both goods and cash payments and workers receive part of their remuneration in goods.

Keywords

Product VarietyFactor PaymentsMoney vs. Barter
Type
Articles
Information
Macroeconomic Dynamics , Volume 17 , Issue 1 , January 2013 , pp. 54 - 88
Copyright
Copyright © Cambridge University Press 2011

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