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Strategically Creating Fiat Money’s Nominal Value in Competitive Markets

Kiyotaki-Wright (1991, 1993) ensured fiat money’s essentiality; but they abstract competition away. Therefore, Lagos-Wright (2005) added a frictionless centralized market to their model; however, their method should be improved. This paper directly substitutes perfectly competitive decentralized markets for the randomly matching market to resolve the competition problem. Under a temporary equilibrium framework, it constructs a dynamic game model where agents choose strategies to determine their prediction functions of future nominal prices with respect to past nominal prices. It proves that a combination of the agents’ strategies to fully accept fiat money cooperatively – to avoid tremendous friction – is a Nash Equilibrium.