Limited memory and the essentiality of money

Abstract

This paper investigates the relationship between memory and the essentiality ofmoney. We consider a random matching economy with a large finite population inwhich commitment is not possible and memory is limited in the sense that only afraction m E(0; 1) of the population has publicly observable histories. We show thatno matter how limited memory is, there exists a social norm that achieves the firstbest regardless of the population size. In other words, money can fail to be essentialirrespective of the amount of memory in the economy. This suggests that the emphasison limited memory as a fundamental friction for money to be essential deserves a deeperexamination.