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Imperfect Monitoring And The Discounting Of Inside Money

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  • David C. Mills, Jr

Abstract

This article evaluates the efficiency of a requirement that private issuers redeem inside money on demand at par in a random-matching model of money where the issuers of inside money are imperfectly monitored. I find that for sufficiently imperfect monitoring, a par redemption requirement leads to lower social welfare than if private money were redeemed at a discount. A central message of the article is that if inside money and outside money are not perfect substitutes, a par redemption requirement may not be socially optimal because such a requirement effectively binds them to circulate as if they are. Copyright © 2008 the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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  • David C. Mills, Jr, 2008. "Imperfect Monitoring And The Discounting Of Inside Money," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(3), pages 737-754, August.
    • Handle: RePEc:ier:iecrev:v:49:y:2008:i:3:p:737-754
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    1. Azariadis, Costas & Bullard, James & Smith, Bruce D., 2001. "Private and Public Circulating Liabilities," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 59-116, July.
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    1. Regulating private money
      by Economic Logician in Economic Logic on 2008-08-20 13:05:00

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    Cited by:

    1. Chao Gu & Fabrizio Mattesini & Randall Wright, 2013. "Banking: A New Monetarist Approach," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(2), pages 636-662.
    2. Randall Wright & Cyril Monnet & Fabrizio Mattesini, 2009. "Banking: a mechanism design approach," 2009 Meeting Papers 635, Society for Economic Dynamics.
    3. Neil Wallace, 2014. "An Attractive Monetary Model with Surprising Implications for Optima: Two Examples," Quarterly Review, Federal Reserve Bank of Minneapolis, issue March, pages 1-16.

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