To develop an integrated theory of money and banking in an analytically rigorous way, this chapter introduces the basic structure of a formal exchange model capturing essential features of the classical problem of a lack of double coincidence of needs and wants in exchange. The model is a market game between a large number of traders designed to fulfil the requirements for the analysis of an integrated theory of money and banking put forward in the preceding chapter: (i) the model is amenable to the introduction of informational market frictions; (ii) individual deals and partners to a contract can be identified; (iii) the terms of the contract such as quantities and prices are endogenously derived from the economic interactions of traders in the market; (iv) individual agents have no market power in the model. Augmented versions of this model will be used in the following chapters to analyze four different transaction technologies in a common framework: i) barter with intermediate exchange of goods; ii) I.O.U.s as a medium of exchange; iii) money as central bank debt; iv) banks providing transaction services.
KeywordsMarket Power Equilibrium Price Market Game Perfect Competition Good Offer
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