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A Model In Which Outside And Inside Money Are Essential

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  • MILLS, DAVID C.

Abstract

I present an environment for which both outside and inside money are essential as means of payment. The key model feature is that there is imperfect monitoring of issuers of inside money. I use a random-matching model of money where some agents have private trading histories and others have trading histories that can be publicly observed only after a lag. I show via an example that for lags that are neither too long nor too short, there exist allocations that use both types of money that cannot be duplicated when only one type is used. Inside money provides liquidity that increases the frequency of trades, but incentive constraints restrict the amount of output that can be traded. Outside money is immune to such constraints and can trade for higher levels of output.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 11 (2007)
Issue (Month): 03 (June)
Pages: 347-366

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Handle: RePEc:cup:macdyn:v:11:y:2007:i:03:p:347-366_06

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  1. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "A model of private bank-note issue," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 104-136, January.
  2. Cavalcanti, Ricardo de O & Wallace, Neil, 1999. "Inside and Outside Money as Alternative Media of Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 443-57, August.
  3. Timothy J Kehoe & David K Levine, 1993. "Debt Constrained Asset Markets," Levine's Working Paper Archive 1276, David K. Levine.
  4. Townsend, Robert M, 1989. "Currency and Credit in a Private Information Economy," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1323-44, December.
  5. Rao Aiyagari, S. & Wallace, Neil & Wright, Randall, 1996. "Coexistence of money and interest-bearing securities," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 397-419, June.
  6. Shi Shougong, 1995. "Money and Prices: A Model of Search and Bargaining," Journal of Economic Theory, Elsevier, vol. 67(2), pages 467-496, December.
  7. Kocherlakota, Narayana & Wallace, Neil, 1998. "Incomplete Record-Keeping and Optimal Payment Arrangements," Journal of Economic Theory, Elsevier, vol. 81(2), pages 272-289, August.
  8. Narayana R. Kocherlakota, 1996. "Money is memory," Staff Report 218, Federal Reserve Bank of Minneapolis.
  9. Ostroy, Joseph M, 1973. "The Informational Efficiency of Monetary Exchange," American Economic Review, American Economic Association, vol. 63(4), pages 597-610, September.
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Cited by:
  1. Sissoko, Carolyn, 2007. "An Idealized View of Financial Intermediation," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 1(5), pages 1-29.
  2. Daniel R. Sanches, 2013. "Banking crises and the role of bank coalitions," Working Papers 13-28, Federal Reserve Bank of Philadelphia, revised 04 Feb 2014.
  3. Pedro Gomis-Porqueras & Daniel R. Sanches, 2010. "Optimal monetary policy in a model of money and credit," Working Papers 11-4, Federal Reserve Bank of Philadelphia.
  4. Mei Dong, 2009. "Money and Costly Credit," 2009 Meeting Papers 404, Society for Economic Dynamics.
  5. Randall Wright, 2014. "Marriage, Markets and Money: A Coasian Theory of Household Formation," 2014 Meeting Papers 237, Society for Economic Dynamics.
  6. Daniel Sanches, 2013. "On the welfare properties of fractional reserve banking," Working Papers 13-32, Federal Reserve Bank of Philadelphia, revised 04 Feb 2013.
  7. David C. Mills, Jr, 2008. "Imperfect Monitoring And The Discounting Of Inside Money," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(3), pages 737-754, 08.
  8. Daniel R. Sanches, 2012. "On the inherent instability of private money," Working Papers 12-19, Federal Reserve Bank of Philadelphia.
  9. Ricardo de O. Cavalcanti & Andrés Erosa & Ted Temzelides, 2005. "Liquidity, Money Creation And Destruction, And The Returns To Banking," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 675-706, 05.
  10. Neil Wallace, 2000. "Knowledge of individual histories and optimal payment arrangements," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 11-21.

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