CFDP 1675

The Value of Fiat Money with an Outside Bank: An Experimental Game


Publication Date: September 2008

Revision Date: April 2010

Pages: 45


Why people accept intrinsically worthless fiat money in exchange for real goods and services has been a longstanding question. There are many competing sufficient explanations that may confound each other in practice but can be individually tested in isolation experimentally. In this paper we examine a sufficient explanation of the value of fiat money through the existence of a debt instrument which allows consumption to be moved earlier in time. We present experimental evidence that the theoretical predictions about the behavior of such economies 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, although many other institutions such as taxation provide alternatives.


Experimental gaming, Bank, Fiat money

JEL Classification Codes: C73, C91