Sufficiency of an Outside Bank and a Default Penalty to Support the Value of Fiat Money: Experimental Evidence
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We present a model in which an outside bank and a default penalty support the value of ﬁat money, and experimental evidence that the theoretical predictions about the behavior of such economies, based on the Fisher-condition, work reasonably well in a laboratory setting. The import of this ﬁnding for the theory of money is to show that the presence of a societal bank and default laws provide suﬀicient structure to support the use of ﬁat money and use of the bank rate to influence inflation or deflation, although other institutions could provide alternatives.
Huber, Juergen; Shubik, Martin; and Sunder, Shyam, "Sufficiency of an Outside Bank and a Default Penalty to Support the Value of Fiat Money: Experimental Evidence" (2008). Cowles Foundation Discussion Papers. 1988.