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Aggregate uncertainty, money and banking

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  • Sun, Hongfei

Abstract

This paper studies the problem of monitoring the monitor in a model of money and banking with aggregate uncertainty. It shows that when inside money is required as a means of bank loan repayment, a market of inside money is entailed at the repayment stage and generates information-revealing prices that perfectly discipline the bank. The incentive problem of a bank is costlessly overcome simply by involving inside money in repayment. Inside money distinguishes itself from outside money by its inherent ability to provide incentives even on the existence of multiple banks. Thus, in addition to providing liquidity to the economy, inside money contributes to banking by eliminating the cost of monitoring the bank and improving the efficiency of intermediation. Moreover, this model establishes that markets can be a favorable instrument for incentives of truthful revelation

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Bibliographic Info

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

Volume (Year): 54 (2007)
Issue (Month): 7 (October)
Pages: 1929-1948

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Handle: RePEc:eee:moneco:v:54:y:2007:i:7:p:1929-1948

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

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  1. Hammond, Peter J, 1987. "Markets as Constraints: Multilateral Incentive Compatibility in Continuum Economies," Review of Economic Studies, Wiley Blackwell, vol. 54(3), pages 399-412, July.
  2. Shouyong Shi, 1995. "Credit and Money in a Search Model with Divisible Commodities," Working Papers 917, Queen's University, Department of Economics.
  3. Hammond, Peter J, 1979. "Straightforward Individual Incentive Compatibility in Large Economies," Review of Economic Studies, Wiley Blackwell, vol. 46(2), pages 263-82, April.
  4. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "Inside and outside money as alternative media of exchange," Proceedings, Federal Reserve Bank of Cleveland, pages 443-468.
  5. Stephen D. Williamson, 1984. "Costly Monitoring, Financial Intermediation, and Equilibrium Credit Rationing," Working Papers 583, Queen's University, Department of Economics.
  6. Ping He & Lixin Huang & Randall Wright, 2005. "Money And Banking In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 637-670, 05.
  7. Krasa, Stefan & Villamil, Anne P, 1992. "A Theory of Optimal Bank Size," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 725-49, October.
  8. Stephen Williamson, 2004. "Limited participation, private money, and credit in a spatial model of money," Economic Theory, Springer, vol. 24(4), pages 857-875, November.
  9. G. B. Gorton & J. G. Haubrich, . "Bank Deregulation, Credit Markets and the Control of Capital," Rodney L. White Center for Financial Research Working Papers 8-86, Wharton School Rodney L. White Center for Financial Research.
  10. David Andolfatto & Ed Nosal, 2003. "A Theory of Money and Banking," Macroeconomics 0310003, EconWPA.
  11. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
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Cited by:
  1. Hongfei Sun, 2007. "Banking, Inside Money and Outside Money," Working Papers 1146, Queen's University, Department of Economics.
  2. Parag Waknis, 2011. "Monetary Policy under Leviathan Currency Competition," Working papers 2011-21, University of Connecticut, Department of Economics.
  3. Allen Head & Junfeng Qiu, 2011. "Elastic Money, Inflation, and Interest Rate Policy," Working Papers 1152, Queen's University, Department of Economics.

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