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Money as a Unit of Account
Author(s) -
Doepke Matthias,
Schneider Martin
Publication year - 2017
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.3982/ecta11963
Subject(s) - economics , unit (ring theory) , unit of account , keynesian economics , monetary economics , psychology , currency , mathematics education
We develop a theory that rationalizes the use of a dominant unit of account in an economy. Agents enter into non‐contingent contracts with a variety of business partners. Trade unfolds sequentially in credit chains and is subject to random matching. By using a dominant unit of account, agents can lower their exposure to relative price risk, avoid costly default, and create more total surplus. We discuss conditions under which it is optimal to adopt circulating government paper as the dominant unit of account, and the optimal choice of “currency areas” when there is variation in the intensity of trade within and across regions.