Game-Theoretic Foundations of Monetary Equilibrium
- Journal of Monetary Economics, Vol. 63, pp. 51-63
- Reseach Area:
- Macro Finance
According to theory, money supports trade in a world without enforcement and, in particular, in large societies, where gift-exchange is unsustainable. It is demonstrated that, in fact, monetary equilibrium breaks down in the absence of adequate enforcement institutions and it collapses as societies that lack external enforcement grow large. This unique result is derived by unveiling the existence of a tacit enforcement assumption in the literature that explains the advantages from monetary exchange, and by integrating monetary theory with the theory of repeated games and social norms.
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