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Private and Public Circulating Liabilities

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  • Azariadis, Costas
  • Bullard, James
  • Smith, Bruce D.

Abstract

Changes in the legal and technological environment in the U.S. have created the possibility of private banknote issue, or its electronic equivalent. We wish to understand the implications of this possibility for economic performance. Accordingly, we construct and analyze a dynamic general equilibrium model in which privately-issued liabilities may circulate, either by themselves, or alongside a stock of outside money. In each case we provide results on the existence and multiplicity of equilibria, and we characterize local dynamics in a neighborhood of a steady state. Our results support Friedman's (1960) idea that circulating private liabilities as associated with endogenous (or "excess") volatility. But implementing Friedman's (1960) advice-the government should ban private issuance of close currency substitutes-causes significant inefficiency in our model. And implementing the polar opposite advice of Hayek (1976) and Fama (1980)-that the government should withdraw from currency issuance altogether in the presence of circulating private liabilities-also is often constrained suboptimal in our economies. Instead, our economies have both public and private circulating liabilities as part of an optimal monetary arrangement.

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Bibliographic Info

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

Volume (Year): 99 (2001)
Issue (Month): 1-2 (July)
Pages: 59-116

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Handle: RePEc:eee:jetheo:v:99:y:2001:i:1-2:p:59-116

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

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References

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  1. Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February.
  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. Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January.
  4. Bruce D. Smith & Warren E. Weber, 1998. "Private money creation and the Suffolk Banking System," Working Paper 9821, Federal Reserve Bank of Cleveland.
  5. Costas Azariadis & James Bullard & Lee E. Ohanian, 1998. "Complex eigenvalues and trend-reverting fluctuations," Staff Report 255, Federal Reserve Bank of Minneapolis.
  6. Champ, B. & Smith, B.D., 1991. "Currency Elasticity and Banking Panics: theory and Evidence," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9109, University of Western Ontario, The Centre for the Study of International Economic Relations.
  7. Townsend, Robert M, 1987. "Economic Organization with Limited Communication," American Economic Review, American Economic Association, vol. 77(5), pages 954-71, December.
  8. Williamson, Stephen D., 1992. "Laissez-faire banking and circulating media of exchange," Journal of Financial Intermediation, Elsevier, vol. 2(2), pages 134-167, June.
  9. Burdett, Kenneth & Trejos, Alberto & Wright, Randall, 2001. "Cigarette Money," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 117-142, July.
  10. Robert Townsend & Neil Wallace, 1982. "A model of circulating private debt," Staff Report 83, Federal Reserve Bank of Minneapolis.
  11. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
  12. Balasko, Yves & Shell, Karl, 1981. "The overlapping-generations model. II. The case of pure exchange with money," Journal of Economic Theory, Elsevier, vol. 24(1), pages 112-142, February.
  13. Eric O'N. Fisher, 1996. "On exchange rates and efficiency (*)," Economic Theory, Springer, vol. 7(2), pages 267-281.
  14. Williamson, Stephen D, 1999. "Private Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 469-91, August.
  15. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  16. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
  17. Smith, Bruce D., 1994. "Mischief and monetary history Friedman and Schwartz thirty years later," Journal of Monetary Economics, Elsevier, vol. 34(1), pages 27-46, August.
  18. Stacey L. Schreft, 1997. "Looking forward : the role for government in regulating electronic cash," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 59-84.
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Citations

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Cited by:
  1. Cyril Monnet & Daniel R. Sanches, 2012. "Private liquidity and banking regulation," Working Papers 12-11, Federal Reserve Bank of Philadelphia.
  2. Holthausen, Cornelia & Monnet, Cyril, 2003. "Money and payments: a modern perspective," Working Paper Series 0245, European Central Bank.
  3. David C. Mills, Jr., 2007. "Imperfect monitoring and the discounting of inside money," Finance and Economics Discussion Series 2007-58, Board of Governors of the Federal Reserve System (U.S.).
  4. Li, Yiting, 2006. "Banks, private money, and government regulation," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 2067-2083, November.
  5. Daniel Sanches, 2013. "On the welfare properties of fractional reserve banking," Working Papers 13-32, Federal Reserve Bank of Philadelphia, revised 04 Feb 2013.
  6. Giuseppe Mastromatteo & Luigi Ventura, 2007. "The origin of money: A survey of the contemporary literature," International Review of Economics, Springer, vol. 54(2), pages 195-224, June.
  7. Nobuhiro Kiyotaki & John Moore, 2002. "Evil Is the Root of All Money," American Economic Review, American Economic Association, vol. 92(2), pages 62-66, May.
  8. repec:hal:gemwpa:hal-00975432 is not listed on IDEAS
  9. Daniel R. Sanches, 2012. "On the inherent instability of private money," Working Papers 12-19, Federal Reserve Bank of Philadelphia.
  10. Monnet, Cyril, 2002. "Optimal public money," Working Paper Series 0159, European Central Bank.

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