Question

Why is fiat-based paper money considered unique for the purpose of time-consistent monetary policy, as opposed to commodity-based money

Answer 1

Fiat money is the kind of money which has it's value , because it is backed by the govt and it's value can remain the same or vary , according to the willingness of govt. On the other hand , commodity money is dependent upon the value of commodity which it is attached to. The demand and supply of the commodity determines the value for the Commodity money.

When dealing with a time consistent monetary policy , a long term bet is made on the money , upon which the monetary policy is based , usually dealing with stability of the financial markets. To make such decision , future rates of money are attested , which is possible and feasible only with Fiat money , of which , the value can be controlled for future aspects. The value of money can be fixed for future while making monetary policy and the market can trust the rate , which is not possible for commodity money . For commodity money , the market forces might interact and influence the value . Hence the stability of nation's financial market is not achieved.

Hence Fiat money is an important aspect of applying a monetary policy , especially having a long run implication.