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Limited Information, Money, and Competitive Equilibrium

Working Paper 204 | Revised November 1, 1985

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Author

Bruce D. Smith

Limited Information, Money, and Competitive Equilibrium

Abstract

In an overlapping generations model with borrowing and lending, uncertainty, and asymmetric information, fiat money may be essential to the existence of a competitive equilibrium. It may also serve to enhance the information of economic agents in a well-defined sense. In addition, the model presented provides suggestions about why the presence of valued fiat currency is essential to existence of equilibrium, even though in equilibrium perfect substitutes for money may exist.