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Barley, Gold, or FiatToward a Pure Theory of Money$
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Thomas Quint and Martin Shubik

Print publication date: 2014

Print ISBN-13: 9780300188158

Published to Yale Scholarship Online: May 2014

DOI: 10.12987/yale/9780300188158.001.0001

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Markets with Gold

Markets with Gold

Chapter:
(p.63) Chapter 6 Markets with Gold
Source:
Barley, Gold, or Fiat
Author(s):

Thomas Quint

Martin Shubik

Publisher:
Yale University Press
DOI:10.12987/yale/9780300188158.003.0006

We study markets with a durable good (gold) as money. At any one time, gold can either give a continuous stream of service utility to its owner if it is being worn as “jewelry”, or it can used for monetary transactions, but not both. Thus a model has to keep track of where the gold is at all times. Hence we break up the model’s time period into a money market (for models with lending), a goods market, and periods in between. We solve a model with no banking (i.e., a “Basic Model” but with the above changes) and with an altruistic bank. We also enlarge the model to include a parameter denoting the per unit salvage value for leftover gold at the end of the game. In all cases, we see inefficient trade, because the traders prefer the service value of some gold rather than using it to facilitate trade all the way to the efficient levels. Finally, at the end of the chapter an alternative formulation is presented, in which there are two kinds of gold (“transactions gold” and “service gold”), with a conversion cost from one kind to the other.

Keywords:   gold coin vs jewelry, gold money, salvage value, stock variable vs flow variable, trading day

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