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Money and finance with costly commitment

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  • Chatterjee, Satyajit
  • Corbae, Dean

Abstract

The authors develop a variant of Townsend's turnpike model where the trading friction is related to a commitment problem rather than spatial separation alone. Specifically, expenditure on financial services is necessary to ensure commitment. When commitment is costless, the equilibrium allocation is equivalent to that from an Arrow sequential markets equilibrium. When commitment is prohibitively expensive, the allocation is similar to the Townsend equilibrium. The authors use numerical examples to study the consequences of costly commitment for co-existence of money and credit, asset pricing, welfare implications of currency and variations in its growth rate, and the relationships between income and financial development.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 37 (1996)
Issue (Month): 2-3 (April)
Pages: 225-248

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Handle: RePEc:eee:moneco:v:37:y:1996:i:2-3:p:225-248

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Web page: http://www.elsevier.com/locate/inca/505566

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References

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  1. Bryant, John & Wallace, Neil, 1979. "The Inefficiency of Interest-bearing National Debt," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(2), pages 365-81, April.
  2. Lucas, Robert E., 1984. "Money in a theory of finance," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 21(1), pages 9-46, January.
  3. Mitsui, Toshihide & Watanabe, Shinichi, 1989. "Monetary growth in a turnpike environment," Journal of Monetary Economics, Elsevier, Elsevier, vol. 24(1), pages 123-137, July.
  4. Townsend, Robert M, 1978. "Intermediation with Costly Bilateral Exchange," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 45(3), pages 417-25, October.
  5. Chatterjee, S. & Corbae, D., 1990. "Endogenous Market Participation and the General Equelibrium Value of Money," Working Papers, University of Iowa, Department of Economics 90-30a, University of Iowa, Department of Economics.
  6. Chatterjee, Satyajit & Corbae, Dean, 1994. "Money and Finance in a Model of Costly Commitment," Working Papers, University of Iowa, Department of Economics 94-21, University of Iowa, Department of Economics.
  7. Townsend, Robert M, 1983. "Financial Structure and Economic Activity," American Economic Review, American Economic Association, vol. 73(5), pages 895-911, December.
  8. Townsend, Robert M., 1987. "Asset-return anomalies in a monetary economy," Journal of Economic Theory, Elsevier, vol. 41(2), pages 219-247, April.
  9. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(4), pages 927-54, August.
  10. Manuelli, Rodolfo & Sargent, Thomas J., 2010. "Alternative Monetary Policies In A Turnpike Economy," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 14(05), pages 727-762, November.
  11. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, Econometric Society, vol. 54(1), pages 23-45, January.
  12. Ireland, Peter N, 1994. "Money and Growth: An Alternative Approach," American Economic Review, American Economic Association, vol. 84(1), pages 47-65, March.
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Cited by:
  1. Lars Boerner & Albrecht Ritschl, 2010. "Communal Responsibility and the Coexistence of Money and Credit Under Anonymous Matching," SFB 649 Discussion Papers SFB649DP2010-060, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

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