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An Idealized View of Financial Intermediation

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  • Sissoko, Carolyn

Abstract

We consider an environment where the general equilibrium assumption that every agent buys and sells simultaneously is relaxed. We show that fiat money can implement a Pareto optimal allocation only if taxes are type-specific. We then consider intermediated money by assuming that financial intermediaries whose liabilities circulate as money have an important identifying characteristic: they are widely viewed as default-free. The paper demonstrates that default-free intermediaries who issue deposit accounts with credit lines to consumers can resolve the monetary problem and make it possible for the economy to reach a Pareto optimum. --

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File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2007-5
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File URL: http://econstor.eu/bitstream/10419/18003/1/economics_2007-5.pdf
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Bibliographic Info

Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

Volume (Year): 1 (2007)
Issue (Month): 5 ()
Pages: 1-29

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Handle: RePEc:zbw:ifweej:5740

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Keywords: Fiat Money; Cash-in-advance; Financial Intermediation;

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  1. James Bullard & Bruce D. Smith, 2001. "The value of inside and outside money," Working Papers, Federal Reserve Bank of St. Louis 2000-027, Federal Reserve Bank of St. Louis.
  2. Brock, William A., 1975. "A simple perfect foresight monetary model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 1(2), pages 133-150, April.
  3. Jeremy Bulow & Kenneth Rogoff, 1998. "Sovereign Debt: Is to Forgive to Forget," Levine's Working Paper Archive 209, David K. Levine.
  4. Aleksander Berentsen & Gabriele Camera, 2004. "Money, Credit, and Banking," 2004 Meeting Papers, Society for Economic Dynamics 473, Society for Economic Dynamics.
  5. Cavalcanti, Ricardo de O & Wallace, Neil, 1999. "Inside and Outside Money as Alternative Media of Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 31(3), pages 443-57, August.
  6. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "A model of private bank-note issue," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 104-136, January.
  7. Stephen D. Williamson, 1999. "Private money," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 469-499.
  8. Carolyn Sissoko, 2007. "Why Inside Money Matters," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 39(8), pages 2097-2105, December.
  9. Neil Wallace, 1998. "A dictum for monetary theory," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 20-26.
  10. Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine, 2004. "Heterogeneity, Redistribution, and the Friedman Rule," Staff General Research Papers, Iowa State University, Department of Economics 11371, Iowa State University, Department of Economics.
  11. Edward J. Green & Ruilin Zhou, 2002. "Money as a mechanism in a Bewley economy," Working Paper Series, Federal Reserve Bank of Chicago WP-02-15, Federal Reserve Bank of Chicago.
  12. Stephen Williamson, 2004. "Limited participation, private money, and credit in a spatial model of money," Economic Theory, Springer, Springer, vol. 24(4), pages 857-875, November.
  13. Timothy J. Kehoe & David K. Levine, 1992. "Debt constrained asset markets," Working Papers, Federal Reserve Bank of Minneapolis 445, Federal Reserve Bank of Minneapolis.
  14. David C. Mills, Jr., 2006. "A model in which outside and inside money are essential," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2006-38, Board of Governors of the Federal Reserve System (U.S.).
  15. Narayana R. Kocherlakota, 2002. "Money: What's the Question and Why Should We Care About the Answer?," American Economic Review, American Economic Association, American Economic Association, vol. 92(2), pages 58-61, May.
  16. 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.
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