Barter and Money, and the Optimality of Legal Restrictions

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Abstract
We examine a monetary economy in which there is an absence of the temporal coincidence of wants, and households are free to barter. If the growth rate of the money supply is sufficiently small, monetary exchange is preferable. Nevertheless, barter may drive out money exchange even if monetary exchange Pareto dominates. Legal restrictions prohibiting barter exchange may therefore be necessary. With stochastic preferences, both barter and money may coexist; agents barter to supplement monetary exchange when they have an unexpectedly high demand. Again, too much exchange may be conducted in barter, and legal restrictions on barter are optimal.
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