What is money capital?

Answer 1

One issue in monetary theory is to determine endogenously which objects play the role of medium of exchange (e.g. Kiyotaki and Wright 1989). In order to focus on other questions, however, other papers avoid this by assuming there is a unique storable asset that qualifies as a candidate for this role. As we obviously cannot assume a unique storable asset in a paper called "Money and Capital" we need to be more careful to guarantee our setup is internally consistent. To this end, we build on two venerable ideas about the origins of monetary exchange (see e.g. Menger 1892) by assuming that money has advantages over capital in terms of portability and recognizability. First, in terms of portability, we adopt an extreme version of this notion by assuming that in the DM agents have their capital physically fixed in place at production sites. Thus, when you want to buy output from some other agent, you must visit his location, and since you cannot bring your capital with you, it cannot beused for payment. Then, to address the question of why claims to (as opposed to physical units of) capital do not circulate in the DM, we adopt an extreme version of the recognizability notion by assuming agents can costlessly counterfeit such claims but not currency.4 For instance, the monetary authority may have a monopoly on a technology for producing hard-to-counterfeit notes. Given this, sellers never accept claims to capital from anonymous buyers in the DM, any more than they accept personal IOU's, and money is the only object that can serve as medium of exchange even though capital is a storable factor of production. We emphasize that we do not regard this as the last word on the coexistence of money and other (higher-return) assets - it is rather a rudimentary but logically coherent setup that allows one to analyze capital-theoretic issues in models that incorporate ingredients from search-based monetary economics, including double coincidence problems, stochastic trading opportunities, bargaining, etc. In the CM there is a general good that can be used for consumption or investment, produced using labor H and capital K hired by firms in competitive markets. Profit maximization implies r = FK(K, H) and w = FH(K, H), where F is the technology, r the rental rate, and w the real wage; constant returns implies equilibrium profits are 0. In the DM these firms do not operate, but an agent's own effort e and capital k can be used with technology f (e, k) to produce a different good. Note that k appears as an input the DM, even if it cannot be used as a means of payment, because when an agent goes to someone else's