2005) “Beyond Search: Fiat Money in Organized Exchange

A model of fiat money is constructed in which spatial separation and the logistics of communication are made explicit as in search theory, but in which exchange is organized by profit-seeking business enterprises as in all market economies. Firms mitigate search costs by opening shops that are easily located. The model endogenizes the number of shops and which objects are traded in each shop. It permits the double coincidence of wants and deals easily with divisible commodities. Equilibria may exist in which fiat money is used as a universal medium of exchange. When such an equilibrium exists, fiat money is essential, in the sense that it is the universal medium of exchange in any efficient network of shops. The model provides a foundation to cash-in-advance theory, without specifying in advance that one object will be used as the universal medium of exchange.