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A Search Model of Money and Circulating Private Debt with Applications to Monetary Policy

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  • Li, Yiting

Abstract

A search-theoretic model is used to examine the coexistence of money and circulating private debt. Money is still valued even though there coexists credit which circulates among agents and dominates in the rate of return. When there coexist multiple equilibria, the equilibrium with credit Pareto dominates the one without credit if money supply is not extremely plentiful. This article also provides some predictions about the effects of monetary policies. A policy of open market operations whereby government discounts less for second-hand debt decreases the value of money, credit, and interest rate prevailing in the market. This policy can also improve welfare by making credit trade feasible when the only equilibrium entails no credit without intervention.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 42 (2001)
Issue (Month): 4 (November)
Pages: 925-46

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Handle: RePEc:ier:iecrev:v:42:y:2001:i:4:p:925-46

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Cited by:
  1. Mark Pingle & Sankar Mukhopadhyay, 2008. "Private Money as a Competing Medium of Exchange," Working Papers 08-004, University of Nevada, Reno, Department of Economics & University of Nevada, Reno , Department of Resource Economics.
  2. Li, Yiting, 2006. "Banks, private money, and government regulation," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 2067-2083, November.
  3. Vlad Ivanenko, 2004. "Access to liquidity and non-monetary trade in Russia," Post-Communist Economies, Taylor & Francis Journals, vol. 16(1), pages 21-38.
  4. Daniel Sanches, 2013. "On the welfare properties of fractional reserve banking," Working Papers 13-32, Federal Reserve Bank of Philadelphia, revised 04 Feb 2013.
  5. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 1-23, January.
  6. Li, Ying-Syuan & Li, Yiting, 2013. "Liquidity and asset prices: A new monetarist approach," Journal of Monetary Economics, Elsevier, vol. 60(4), pages 426-438.
  7. Ed Nosal & Guillaume Rocheteau, 2006. "The economics of payments," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Feb.
  8. 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.
  9. Shouyong Shi, 2006. "A Microfoundation of Monetary Economics," Working Papers tecipa-211, University of Toronto, Department of Economics.

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