Circulation of Private Notes during a Currency Shortage
AbstractThis paper provides a search theoretical model that captures two phenomena that have characterized several episodes of monetary history: currency shortages and the circulation of privately issued notes. As usual in these models, the media of exchange are determined as part of the equilibrium. We characterize all the different equilibria and specify the conditions under which there is a currency shortage and/or privately issued notes are used as means of payment. There is multiplicity of equilibria for the entire parameter space, but there always exist an equilibrium in which notes circulate, either alone or together with coins. Hence, credit is a self-fulfilling phenomenon that depends on the beliefs of agents about the acceptability and future repayment of notes. The degree of circulation of coins depends on two crucial parameters, the intrinsic utility of holding coins and the extent with which it is possible to find exchange opportunities in the market.
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Bibliographic InfoPaper provided by Barcelona Graduate School of Economics in its series Working Papers with number 164.
Date of creation: Mar 2005
Date of revision:
Other versions of this item:
- Xavier Cuadras-Morató, 2009. "Circulation Of Private Notes During A Currency Shortage," Manchester School, University of Manchester, vol. 77(4), pages 461-478, 07.
- Xavier Cuadras Morató, 2005. "Circulation of private notes during a currency shortage," Economics Working Papers 811, Department of Economics and Business, Universitat Pompeu Fabra.
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
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