On Money as a Medium of Exchange

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Abstract
We analyze economies in which individuals specialize in consump- tion and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo. Nash equilib- ria in trading strategies are characterized. Certain goods emerge endogenously as media of exchange, or commodity money, depend- ing both on their intrinsic properties and on extrinsic beliefs. There are also equilibria with genuine fiat currency circulating as the gen- eral medium of exchange. We find that equilibria are not generally Pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare. Velocity, ac- ceptability, and liquidity are discussed.

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