Game-theoretic foundations of monetary equilibrium |
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| Institution: | 1. Economic Science Institute, Chapman University, One University dr., Orange, CA 92866, USA;2. SAFE, Goethe University, Grüneburgplatz 1, 60323 Frankfurt am Main, Germany;1. Department of Computer Science & Engineering, University of Ioannina, GR-45110 Ioannina, Greece;2. Air Force Research Laboratory, Rome, NY, USA;1. University of Chicago Booth School of Business, USA;2. NBER, USA;1. Harvard University, USA;2. Bank of International Settlements, Switzerland;3. INSEAD, France;1. New York University, 40 Washington Square South, New York, NY 10012, United States;2. Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue N.W., Washington, D.C. 20551, United States |
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| Abstract: | 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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| Keywords: | Social norms Repeated games Cooperation Institutions Payment systems |
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