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Abstract

We study the interplay between competition and trust as efficiency-enhancing mechanims in the private provision of money. With commitment, trust is automatically achieved and competition ensures efficiency. Without commitment, competition plays no role. Trust does play a role but requires a lower bound on efficiency. Stationary inflation must be positive and, therefore, the Friedman rule cannot be achieved. The quality of money can only be observed after its purchasing capacity is realized. In that sense money is an experience good. We show that the two problems, the time-inconsistency in the private provision of money and moral-hazard in the provision of experience goods, are isomorphic, and therefore the same results are attained in both settings.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7418.

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Date of creation: Aug 2009
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Handle: RePEc:cpr:ceprdp:7418

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Related research

Keywords: Currency competition; Experience goods; Inflation; Trust;

Other versions of this item:

Find related papers by JEL classification:

• E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
• E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
• E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
• E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

This paper has been announced in the following NEP Reports:

• NEP-ALL-2009-11-27 (All new papers)
• NEP-CBA-2009-11-27 (Central Banking)
• NEP-MAC-2009-11-27 (Macroeconomics)
• NEP-MIC-2009-11-27 (Microeconomics)
• NEP-MON-2009-11-27 (Monetary Economics)

References

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1. Nakamura, Emi & Steinsson, Jón, 2011. "Price setting in forward-looking customer markets," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 220-233.
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5. Taub, Bart, 1986. "Asymptotic Properties of Pipeline Control of the Money Supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(3), pages 647-65, October.
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8. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
9. Charles W. Calomiris & Charles M. Kahn, 1996. "The Efficiency of Self-Regulated Payments Systems: Learning From the Suffolk System," NBER Working Papers 5442, National Bureau of Economic Research, Inc.
   
   • Charles W. Calomiris & Charles M. Kahn, 1996. "The efficiency of self-regulated payments systems: learning from the Suffolk System," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 766-803.
   • Calomiris, Charles W & Kahn, Charles M, 1996. "The Efficiency of Self-Regulated Payments Systems: Learning from the Suffolk System," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 766-97, November.
10. Jonathan Levin, 2009. "The Dynamics of Collective Reputation," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 27.
    
    • Jonathan Levin, 2009. "The Dynamics of Collective Reputation," Discussion Papers 08-024, Stanford Institute for Economic Policy Research.
11. Battigalli, Pierpaolo, 1996. "Strategic Independence and Perfect Bayesian Equilibria," Journal of Economic Theory, Elsevier, vol. 70(1), pages 201-234, July.
12. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
13. Ireland, Peter N., 1997. "Sustainable monetary policies," Journal of Economic Dynamics and Control, Elsevier, vol. 22(1), pages 87-108, November.
14. Bils, Mark, 1989. "Pricing in a Customer Market," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 699-718, November.
15. Klein, Benjamin, 1974. "The Competitive Supply of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(4), pages 423-53, November.

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:

1. Trust in private money
   by Economic Logician in Economic Logic on 2011-08-19 14:11:00
2. Money is an Experience Good: Competition and Trust in the Private Provision of Money
   by Christian Zimmermann in NEP-DGE blog on 2012-05-20 02:18:16

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1. Economic Logic blog

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