On money as a medium of exchange

Nobuhiro Kiyotaki, Randall Wright

Research output: Contribution to journalArticlepeer-review

648 Scopus citations


We analyze economies in which individuals specialize in consump-tion and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo. Nash equilib-ria in trading strategies are characterized. Certain goods emerge endogenously as media of exchange, or commodity money, depend-ing both on their intrinsic properties and on extrinsic beliefs. There are also equilibria with genuine fiat currency circulating as the gen-eral medium of exchange. We find that equilibria are not generally Pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare. Velocity, ac-ceptability, and liquidity are discussed.

Original languageEnglish (US)
Pages (from-to)927-954
Number of pages28
JournalJournal of Political Economy
Issue number4
StatePublished - Aug 1989
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics


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