We construct a simple general equilibrium model to demonstrate how eliminating cash can lead to a misallocation of resources in a naturally segmented economy with observed (official) and non-observed (informal) sectors. The source of inefficiency mirrors the standard arguments explaining why money is essential: a promise backed by a good produced in one sector can not be used in another and so absence of a reliable fiat money reduces the gains from trade. We also point to several additional unintended consequences of cash elimination.
Bibliographical notePublisher Copyright:
© 2019 Elsevier B.V.
- Segmented markets
- Shadow economy
ASJC Scopus subject areas
- Economics and Econometrics
- Political Science and International Relations