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Competitive Bank Monies: Reconsidering Hayek and Klein from a Transactions Perspective

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Abstract

In this paper the case made by Klein (1975) and Hayek (1976) for competitive bank monies is reconsidered. To do so we build a model of the demand for bank money that derives from money’s ability to separate commodity purchases from sales across time and so avoid the trading costs implied by barter and the double coincidence of wants. Such a model allows us to view the bank cheating or time inconsistency problem alleged to undermine the case for free banking as part of a larger concern with the creation and maintenance of bank quality in a competitive banking environment. As such it helps to further refine the circumstances under which competition is and is not consistent with optimal money provision and stable money prices.

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Bibliographic Info

Paper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number 03-02.

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Length: 21 pages
Date of creation: 15 Feb 2003
Date of revision:
Publication status: Published: Carleton Economic Papers
Handle: RePEc:car:carecp:03-02

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Keywords: Competition in Banking; Free Banking; monetary credibility; Bank quality;

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  1. Ritter, Joseph A, 1995. "The Transition from Barter to Fiat Money," American Economic Review, American Economic Association, vol. 85(1), pages 134-49, March.
  2. J. S. Ferris & J. A. Galbraith, 2003. "Indirect convertibility as a money rule for inflation targeting," Applied Financial Economics, Taylor & Francis Journals, vol. 13(10), pages 753-761.
  3. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
  4. Ferris, J Stephen, 1981. "A Transactions Theory of Trade Credit Use," The Quarterly Journal of Economics, MIT Press, vol. 96(2), pages 243-70, May.
  5. Saving, Thomas R, 1971. "Transactions Costs and the Demand for Money," American Economic Review, American Economic Association, vol. 61(3), pages 407-20, June.
  6. Joel Fried, 1973. "Money, Exchange And Growth," Economic Inquiry, Western Economic Association International, vol. 11(3), pages 285-301, 09.
  7. Jones, Robert A, 1976. "The Origin and Development of Media of Exchange," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 757-75, August.
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