Recent episodes of de-monetization show that private credit can be a substitute for money. This paper studies the conditions of money circulation when non-circulating private debts (IOUs) can be a substitute for money. I first present a simple model of inside money where money circulates if and only if monetary intermediaries have a comparative advantage in debt management. If they loose their comparative advantage, the economy endogenously switches to a non-monetary equilibrium where transactions are paid with private debts. Introducing heterogeneity among agents, I show that the decentralized equilibrium can yield an inefficient outcome: The State can achieve a Pareto superior outcome if it forces money circulation. In some cases, the legal centralization of debt management in the hand of a relatively inefficient agent can improve the welfare of the economy. I show nevertheless that this policy is dominated by a simple optimal mechanism.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.: