Hard Money and Fiat Money in an Inflationary World

Abstract

The purpose is to determine whether a borrower prefers to borrow hard and fiat money from a bank to buy other assets from a seller, whether the seller wants to sell, how the nontraders are impacted, and whether the bank prefers to lend money and print or withdraw fiat money. The method is to compare the agents’ and bank’s Cobb Douglas utilities over two periods. The conclusions are that the bank prefers to print fiat money to a certain extent. Fiat money printing benefits the borrower/buyer which prefers inflation, benefits the bank if not excessive, and hurts the seller and nontraders. The seller and nontraders prefer a hard money economy or a fiat economy where the bank withdraws money to ensure deflation. More nontraders decrease inflation since the bank’s money printing gets spread across more agents. The article provides further results illustrated by varying 64 parameters relative to a benchmark.