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Optimal public money

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  • Monnet, Cyril

Abstract

In most countries, the supply of paper money is controlled by a state institution. This paper provides an explanation for why such an arrangement is typically chosen. I use a deterministic matching model with a continuum of agents where enforcement is limited and where some agents produce public goods. Agents can also, at a cost, produce a distinguishable, intrinsically useless but perfectly durable good: notes. I call a note public if it is printed by an agent who produces public goods. In this framework, I prove that the socially optimal allocation is only implemented by a pattern of trade in which exchanges are effected using public notes. JEL Classification: D8, E5

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0159.

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Date of creation: Jul 2002
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Handle: RePEc:ecb:ecbwps:20020159

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Keywords: Limited Commitment; Money;

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References

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  1. Cavalcanti, R. & Erosa, A. & Temzelides, T., 1997. "Private Money and Reserve Management in a Random Matching Model," UWO Department of Economics Working Papers 9715, University of Western Ontario, Department of Economics.
  2. Azariadis, Costas & Bullard, James & Smith, Bruce D., 2001. "Private and Public Circulating Liabilities," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 59-116, July.
  3. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August.
  4. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "Inside and outside money as alternative media of exchange," Proceedings, Federal Reserve Bank of Cleveland, pages 443-468.
  5. Stephen D. Williamson, 1999. "Private money," Proceedings, Federal Reserve Bank of Cleveland, pages 469-499.
  6. Dean Corbae & Ted Temzelides & Randall Wright, 2002. "Matching and Money," American Economic Review, American Economic Association, vol. 92(2), pages 67-71, May.
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Cited by:
  1. Holthausen, Cornelia & Monnet, Cyril, 2003. "Money and payments: a modern perspective," Working Paper Series 0245, European Central Bank.
  2. Martin, Antoine & Schreft, Stacey L., 2006. "Currency competition: A partial vindication of Hayek," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 2085-2111, November.
  3. Monnet, Cyril, 2005. "Counterfeiting and inflation," Working Paper Series 0512, European Central Bank.
  4. Starr, Ross M., 2003. "Monetary general equilibrium with transaction costs," Journal of Mathematical Economics, Elsevier, vol. 39(3-4), pages 335-354, June.
  5. F H Capie & Dimitrios P Tsomocos & Geoffrey E Wood, 2003. "E-barter versus fiat money: will central banks survive?," Bank of England working papers 197, Bank of England.

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