This article analyzes a general equilibrium model with search frictions and differentiated commodities. Because of the many differentiated commodities, barter is difficult in that it requires a double coincidence of wants, and this provides a medium of exchange role for fiat currency. We prove the existence of equilibrium with valued fiat money and show it is robust to certain changes in the environment. Rate of return dominance, liquidity, and the welfare implications of fiat money are discussed.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics