Macro Modeling

In macroeconomics last week, we read a paper by Kiyotaki and Wright where they used a simple model that explains the existence of fiat money – i.e. money that has no value in itself .  Think of it this way, if people stopped accepting your dollar bills, what would they be good for?  I’m not sure its value is tinder is all that high.

Anyways, the paper highlighted to me just how difficult some ideas which seem obvious are to model convincingly.  Any economist would say that money facilitates trade, and that barter would be prohibitively difficult/expensive to work in the modern world, but that doesn’t mean it’s clear how to build a model to show that.  To be honest, even the results in this paper seems pretty dependent on some very restrictive assumptions.  I guess going over the paper just brought home the point that any of these models needs to be taken with a grain of salt and considered carefully because some of the assumptions that are necessary for them to be tractable mathematically also make them less than realistic, and it’s important to consider which assumptions are really driving a model’s results.