Money in a theory of exchange

Abstract

Major problems in monetary economics are to: introduce money into the economy in a way that explains how money arises endogenously; explain why money is preferred to other methods of exchange; and identify the welfare gains from using money. In this paper, Daniel L. Thornton develops a framework for assessing money's role in the economy and identifies the welfare gains associated with its use. In Thornton's framework, money is welfare enhancing not only because it reduces the resources necessary for exchange-thereby increasing both consumption and leisure-but, money further increases welfare by promoting further trade and greater specialization. ; Thornton then discusses the implications of his analysis for several important issues in monetary theory: the existence of fiat money; the role of money and credit in exchange; the asset demand for money; the buffer-stock notion of money demand; the welfare benefits of money; and the welfare costs of inflation.Money ; Monetary theory