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Money and credit with limited commitment and theft

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  • Sanches, Daniel
  • Williamson, Stephen

Abstract

We study the interplay among imperfect memory, limited commitment, and theft, in an environment that can support monetary exchange and credit. Imperfect memory makes money useful, but it also permits theft to go undetected, and therefore provides lucrative opportunities for thieves. Limited commitment constrains credit arrangements, and the constraints tend to tighten with imperfect memory, as this mitigates punishment for bad behavior in the credit market. Theft matters for optimal monetary policy, but at the optimum theft will not be observed in the model. The Friedman rule is in general not optimal with theft, and the optimal money growth rate tends to rise as the cost of theft falls.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 145 (2010)
Issue (Month): 4 (July)
Pages: 1525-1549

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Handle: RePEc:eee:jetheo:v:145:y:2010:i:4:p:1525-1549

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Web page: http://www.elsevier.com/locate/inca/622869

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Keywords: Money Credit Imperfect memory Theft Optimal monetary policy;

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References

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  1. James Bullard & Costas Azariadis & Gaetano Antinolfi, 2008. "The Optimal Inflation Target in an Economy with Limited Enforcement," 2008 Meeting Papers 915, Society for Economic Dynamics.
  2. David Andolfatto, 2007. "Incentives and the Limits to Deflationary Policy," Discussion Papers dp07-14, Department of Economics, Simon Fraser University.
  3. S. Rao Aiyagari & Stephen D. Williamson, 1999. "Credit in a Random Matching Model with Private Information," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 36-64, January.
  4. Ireland, Peter N, 1994. "Money and Growth: An Alternative Approach," American Economic Review, American Economic Association, vol. 84(1), pages 47-65, March.
  5. Deviatov, Alexei & Wallace, Neil, 2009. "A model in which monetary policy is about money," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 283-288, April.
  6. Guillaume Rocheteau & Randall Wright, 2003. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," PIER Working Paper Archive 03-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  7. Ricardo Lagos & Randall Wright, 2004. "A unified framework for monetary theory and policy analysis," Staff Report 346, Federal Reserve Bank of Minneapolis.
  8. Atkeson, Andrew & Lucas, Robert E, Jr, 1992. "On Efficient Distribution with Private Information," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 427-53, July.
  9. S. Rao Aiyagari & Stephen D. Williamson, 1998. "Money and dynamic credit arrangements with private information," Working Paper 9807, Federal Reserve Bank of Cleveland.
  10. He, Ping & Huang, Lixin & Wright, Randall, 2008. "Money, banking, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1013-1024, September.
  11. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August.
  12. Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 118-41, February.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Money and Credit With Limited Commitment and Theft
    by Christian Zimmermann in NEP-DGE blog on 2010-03-02 03:11:55
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Cited by:
  1. Randall Wright & Vaidyanathan (Venky) Venkateswaran, 2012. "Pledgability and Liquidity," 2012 Meeting Papers 601, Society for Economic Dynamics.
  2. Moscarini, Giuseppe & Wright, Randall, 2010. "Introduction to Search Theory and Applications," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1319-1324, July.
  3. Jonathan Chiu & Mei Dong & Enchuan Shao, 2012. "On the Welfare Effects of Credit Arrangements," Working Papers 12-43, Bank of Canada.
  4. Cyril Monnet, 2010. "Comment on Cavalcanti and Nosal's "Counterfeiting as private money in mechanism design"," Working Papers 10-29, Federal Reserve Bank of Philadelphia.
  5. Pedro Gomis‐Porqueras & Daniel Sanches, 2013. "Optimal Monetary Policy in a Model of Money and Credit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(4), pages 701-730, 06.
  6. Stephen Williamson & Randall Wright, 2010. "New monetarist economics: methods," Review, Federal Reserve Bank of St. Louis, issue May, pages 265-302.
  7. Mei Dong, 2011. "Money and Costly Credit," Working Papers 11-7, Bank of Canada.
  8. Stephen D. Williamson & Randall Wright, 2010. "New Monetarist Economics: models," Staff Report 443, Federal Reserve Bank of Minneapolis.
  9. Nosal, Ed & Waller, Christopher J. & Wright, Randall, 2011. "Introduction To The Macroeconomic Dynamics Special Issues On Money, Credit, And Liquidity," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S1), pages 1-9, April.
  10. Becsi, Zsolt & Li, Victor E. & Wang, Ping, 2013. "Credit mismatch and breakdown," European Economic Review, Elsevier, vol. 59(C), pages 109-125.
  11. Stephen D. Williamson, 2010. "Liquidity, Financial Intermediation, and Monetary Policy in a New Monetarist Model," 2010 Meeting Papers 244, Society for Economic Dynamics.

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