Commodity money equilibrium in a convex trading post economy with transaction costs

Abstract

Existence and efficiency of general equilibrium with commodity money is investigated in an economy where N commodities are traded atcommodity-pairwise trading posts. Trade is a resource-using activity recovering transaction costs through the spread between bid (wholesale) and ask (retail) prices. Budget constraints, enforced at each trading post separately, imply demand for a carrier of value between trading posts. Existence of general equilibrium is established under conventional convexity and continuity conditions while structuring the price space to account for distinct bid and ask price ratios. Commodity money flows are identified as the difference between gross and net inter-post trades.

The Superiority of Monetary Over Barter Exchange: Experimental Results and Policy Implications

“…Over the years economists have proposed a number of answers to this question that rely on some sort of transactions costs which tend to favor some good (or goods) over others as a medium of transactions (see, e.g., Niehans, 1971; Ostroy, 1973; Jones, 1976; Norman, 1987; Kiyotaki and Wright, 1989). In a series of recent contributions Starr (2003, 2007) has worked out sufficient conditions for a common medium of exchange to be the outcome of an economic general equilibrium: the existence of transaction costs and market segmentation in terms of trading posts (i.e., a budget constraint on each transaction not just on net trade). Starr shows that scale economies in the transaction technology lead to uniqueness of the medium of exchange which is a fiat money when the government accepts it for tax payment.…”

Safe Assets as Commodity Money

“…Instead, trading takes place in n markets in which risky assets are traded for the safe asset. Starr () shows that these money‐good bilateral markets can lead to the exclusion of good–good markets if bilateral markets are costly to open. Hart and Zingales () offer some microfoundations for the emergence of safe assets as the medium of exchange.…”