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Money and finance with costly commitment

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  • Satyajit Chatterjee
  • Dean Corbae

Abstract

The authors develop a variant of Townsend's turnpike model where the trading friction is related to a commitment problem rather than spatial separation alone. Specifically, expenditure on financial services is necessary to ensure commitment. When commitment is costless, the equilibrium allocation is equivalent to that from an Arrow sequential markets equilibrium. When commitment is prohibitively expensive, the allocation is similar to the Townsend equilibrium. The authors use numerical examples to study the consequences of costly commitment for co-existence of money and credit, asset pricing, welfare implications of currency and variations in its growth rate, and the relationships between income and financial development.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 96-8.

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Date of creation: 1996
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Handle: RePEc:fip:fedpwp:96-8

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Related research

Keywords: Financial services industry ; Money theory ; Velocity of money;

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  1. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
  2. Ireland, Peter N, 1994. "Money and Growth: An Alternative Approach," American Economic Review, American Economic Association, vol. 84(1), pages 47-65, March.
  3. Townsend, Robert M., 1987. "Asset-return anomalies in a monetary economy," Journal of Economic Theory, Elsevier, vol. 41(2), pages 219-247, April.
  4. Chatterjee, Satyajit & Corbae, Dean, 1992. "Endogenous Market Participation and the General Equilibrium Value of Money," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 615-46, June.
  5. Mitsui, Toshihide & Watanabe, Shinichi, 1989. "Monetary growth in a turnpike environment," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 123-137, July.
  6. Manuelli, Rodolfo & Sargent, Thomas J., 2010. "Alternative Monetary Policies In A Turnpike Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 14(05), pages 727-762, November.
  7. Townsend, Robert M, 1983. "Financial Structure and Economic Activity," American Economic Review, American Economic Association, vol. 73(5), pages 895-911, December.
  8. Chatterjee, Satyajit & Corbae, Dean, 1994. "Money and Finance in a Model of Costly Commitment," Working Papers 94-21, University of Iowa, Department of Economics.
  9. Bryant, John & Wallace, Neil, 1979. "The Inefficiency of Interest-bearing National Debt," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 365-81, April.
  10. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
  11. Lucas, Robert E., 1984. "Money in a theory of finance," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 9-46, January.
  12. Townsend, Robert M, 1978. "Intermediation with Costly Bilateral Exchange," Review of Economic Studies, Wiley Blackwell, vol. 45(3), pages 417-25, October.
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Cited by:
  1. Boerner, Lars & Ritschl, Albrecht, 2011. "Communal Responsibility and the Coexistence of Money and Credit Under Anonymous Matching," CEPR Discussion Papers 8184, C.E.P.R. Discussion Papers.

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