Abstract - Economics Research Reports

 

Monetary Equilibrium with Decentralized Trade and Learning

By Luis Araujo (Michigan State University) and Braz Camargo (University of Western Ontario)

March, 2005

This paper analyzes the stability of monetary regimes in an economy where fiat money is endogenously created by the government, information about its value is imperfect, and learning is decentralized. We show that monetary stability depends crucially on the speed of information transmission in the economy. Our model generates a dynamic on the acceptability of fiat money that resembles historical accounts of the rise and eventual collapse of over-issued paper money. It also provides an explanation of the fact that, despite its obvious advantages, the widespread use of fiat money is only a recent development.

JEL Classification: C13; C14; C23; C25
Keywords: dynamic discrete choice models; finite mixture; nonparametric identification; panel data; sieve estimator; unobserved heterogeneity

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