On the inherent instability of private money
AbstractWe show the existence of an inherent instability associated with a purely private monetary system due to the role of endogenous debt limits in the creation of private money. Because the bankers’ ability to issue liabilities that circulate as a medium of exchange depends on beliefs about future credit conditions, there can be multiple equilibria. Some of these equilibria have undesirable properties: Self-fulfilling collapses of the banking system and persistent fluctuations in the aggregate supply of bank liabilities are possible. In response to this inherent instability of private money, we formulate a government intervention that guarantees that the economy remains arbitrarily close to the constrained efficient allocation. In particular, we define an operational procedure for a central bank capable of ensuring the stability of the monetary system.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. 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.
Bibliographic InfoPaper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 12-19.
Date of creation: 2012
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-08-23 (All new papers)
- NEP-DGE-2012-08-23 (Dynamic General Equilibrium)
- NEP-MAC-2012-08-23 (Macroeconomics)
- NEP-MON-2012-08-23 (Monetary Economics)
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.:
- 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.
- Antoine Martin & Stacey L. Schreft, 2003. "Currency competition : a partial vindication of Hayek," Research Working Paper RWP 03-04, Federal Reserve Bank of Kansas City.
- Cavalcanti, Ricardo & Erosa, Andres & Temzelides, Ted, .
"Private Money and Reserve Management in a Random Matching Model,"
97-17, University of Iowa, Department of Economics, revised Sep 1997.
- Ricardo de O. Cavalcanti & Andres Erosa & Ted Temzelides, 1999. "Private Money and Reserve Management in a Random-Matching Model," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 929-945, October.
- Ricardo de O. Cavalcanti & Andres Erosa, 1998. "Private Money And Reserve Management In A Random Matching Model," Macroeconomics 9802010, EconWPA.
- Ricardo Cavalcanti & Andres Erosa & Ted Temzelides, 1997. "Private money and reserve management in a random matching model," Working Papers 97-24, Federal Reserve Bank of Philadelphia.
- Ricardo de O. Cavalcanti & Andres Erosa & Ted Temzelides, 1999. "Private money and reserve management in a random-matching model," Discussion Paper / Institute for Empirical Macroeconomics 128, Federal Reserve Bank of Minneapolis.
- 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.
- Ricardo Cavalcanti & Andres Erosa & Ted Temzelides, 1998. "Private Money and Reserve Management in a Random Matching Model," Macroeconomics 9803008, EconWPA.
- Cavalcanti, Ricardo de O & Wallace, Neil, 1999.
"Inside and Outside Money as Alternative Media of Exchange,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 31(3), pages 443-57, August.
- 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.
- Champ, B. & Snith, B.D. & Williamson, D.S., 1991.
"Currency Elasticity and Banking Panics: Theory and Evidence,"
RCER Working Papers
292, University of Rochester - Center for Economic Research (RCER).
- Bruce Champ & Bruce D. Smith & Stephen D. Williamson, 1996. "Currency Elasticity and Banking Panics: Theory and Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 828-64, November.
- Champ, B. & Smith, B.D., 1991. "Currency Elasticity and Banking Panics: theory and Evidence," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9109, University of Western Ontario, The Centre for the Study of International Economic Relations.
- Gaetano Antinolfi & Elisabeth Huybens, 2000.
"Monetary Stability and Liquidity Crises: The Role of the Lender of Last Resort,"
Econometric Society World Congress 2000 Contributed Papers
1156, Econometric Society.
- Antinolfi, Gaetano & Huybens, Elisabeth & Keister, Todd, 2001. "Monetary Stability and Liquidity Crises: The Role of the Lender of Last Resort," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 187-219, July.
- Gaetano Antinolfi & Elisabeth Huybens & Todd Keister, 2000. "Monetary Stability and Liquidity Crises: The Role of the Lender of Last Resort," Working Papers 0001, Centro de Investigacion Economica, ITAM.
- 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.
- David C. Mills, Jr., 2006.
"A model in which outside and inside money are essential,"
Finance and Economics Discussion Series
2006-38, Board of Governors of the Federal Reserve System (U.S.).
- Mills, David C., 2007. "A Model In Which Outside And Inside Money Are Essential," Macroeconomic Dynamics, Cambridge University Press, vol. 11(03), pages 347-366, June.
- Shouyong Shi, 1996.
"A Divisible Search Model of Fiat Money,"
930, Queen's University, Department of Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Beth Paul).
If references are entirely missing, you can add them using this form.