Money and Beliefs∗

Monetary models with explicit microfoundations always exhibit equilibria where fiat money has no value and agents are strictly worse off. Such equilibria are usually viewed as natural, as an implication of the fact that valued fiat money is purely a belief-driven phenomenon. In this paper, we push the opposite view by showing that if there are enough gains from trade fiat money equilibria always exist but nonmonetary equilibria that are Pareto dominated by money relies on agents being sure that money will never be accepted in any state. The belief that money might eventually become useful, even if only in an almost unreachable state, implies that for a large range of parameters, agents’ beliefs and behavior are completely determined by fundamentals.