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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.

Suggested Citation

  • Satyajit Chatterjee & Dean Corbae, 1996. "Money and finance with costly commitment," Working Papers 96-8, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:96-8
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    References listed on IDEAS

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    1. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
    2. Mitsui, Toshihide & Watanabe, Shinichi, 1989. "Monetary growth in a turnpike environment," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 123-137, July.
    3. Chatterjee, Satyajit & Corbae, Dean, 1994. "Money and Finance in a Model of Costly Commitment," Working Papers 94-21, University of Iowa, Department of Economics.
    4. Townsend, Robert M, 1983. "Financial Structure and Economic Activity," American Economic Review, American Economic Association, vol. 73(5), pages 895-911, December.
    5. Bryant, John & Wallace, Neil, 1979. "The Inefficiency of Interest-bearing National Debt," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 365-381, April.
    6. 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 615-646, June.
    7. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
    8. 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.
    9. Manuelli, Rodolfo & Sargent, Thomas J., 2010. "Alternative Monetary Policies In A Turnpike Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 14(5), pages 727-762, November.
    10. Townsend, Robert M., 1987. "Asset-return anomalies in a monetary economy," Journal of Economic Theory, Elsevier, vol. 41(2), pages 219-247, April.
    11. Ireland, Peter N, 1994. "Money and Growth: An Alternative Approach," American Economic Review, American Economic Association, vol. 84(1), pages 47-65, March.
    12. Robert M. Townsend, 1978. "Intermediation with Costly Bilateral Exchange," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 45(3), pages 417-425.
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    Cited by:

    1. Lars Boerner & Albrecht Ritschl, 2010. "Communal Responsibility and the Coexistence of Money and Credit Under Anonymous Matching," SFB 649 Discussion Papers SFB649DP2010-060, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

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