A Dynamic Game for Essentiality of Fiat Money from the Perspective of GE

Abstract

This paper addresses firstly why people have to use fiat money and then why they are rationally willing to accept it from the perspective of general equilibrium by using dynamic game to determine agents' expectation of its purchasing power in unrevealed future. Its model formulates the process that agents determine fiat money's nominal value in an infinite-time decentralized sequence economy where agents use fiat money to bridge markets to avoid huge transaction cost. It is proved that all agents' accepting fiat money with expectation of unchanged nominal value of it is Nash equilibrium so as to guarantee fiat money's essentiality.