Distribution-Dependent Value of Money: A Coalition-Proof Approach to Monetary Equilibrium

We present a simple, finite-state search model to understand how the cross-sectional distribution of money affects its value. We first document a network effect: the value of a given unit of money is higher when its distribution is even, rather than skewed. We also find some distributions to be destabilizing: there is strong incentive to form coalitions to“repudiate the incumbent and re-issue new currency” when the distribution is skewed. In this regard, we suggest that conventional “Nash” monetary equilibria be refined to be “coalition-proof” in the spirit of Bernheim et al. (1987). Our approach highlights the merits of investigating non-stationary distributions per se, as opposed to (the typically favored) steady states. This approach is designed to be especially pertinent in the context of private issuance of money, in particular, cryptocurrencies.