Monetary Paradoxes of Baby-Sitting Cooperatives

Asad Zaman


Many authors have described and modelled Keynesian effects in
a Baby-sitting Cooperative (BSC), which has the underlying structure of
a single good barter economy. We construct a simple model of the BSC
economy to explore this issue, and find very surprising results.
Outcomes depend on agents beliefs about the decision making process of
others, as in the Keynesian beauty contest. For some structures of
beliefs, money is neutral, while for others, money can have short and
long run effects. The value of money can be high, low, or zero,
depending purely upon expectational effects. Also, despite the fact that
this is a single good economy, partial equilibrium supply and demand
analysis do not work as expected. Some equilibria have excess supply,
others have excess demand, and none have a match between supply and
demand. Furthermore, flexible prices cannot fix this problem. An
additional paradoxical property is that excessive trading can take
place. Even though all trades are done with mutual consent, some of them
decrease welfare, and banning certain types of trade can lead to Pareto
improvements. Thus the superficially simple single good barter economy
of BSC displays some subtle, complex and counter-intuitive properties.
JEL Classifications: D71, E52 Keywords: Monetary Policy, Keynesian
Economics, Sunspot Equilibria, Neutrality of Money

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