Learning and Money Adoption

Abstract

Hirshleifer (1971) famously argued that the public disclosure of socially useless information hurts welfare because it creates unwanted economic fluctuations. We show that this logic can fail if the disclosed information concerns the medium of exchange. We consider an economy where agents gradually learn about the quality of a new asset and coordinate to adopt it as a medium of exchange or abandon it. The demand of this money-like asset can be partially convex, and the convexity translates more economic fluctuations into higher asset prices, making the asset a more useful payment device. Therefore more information disclosure sometimes raises welfare, even when information is not socially useful, i.e. when new information does not affect agents’ adoption decisions. When there are competing monies, the aggregate liquidity and welfare can be non-monotone in beliefs and hence a good news about a new money can be a bad news for the aggregate economy. In an extension with heterogenous agents we illustrate that the presence of some hodlers can change the allocation substantially.