This note observes that in a simple infinite horizon economy with heterogeneous endowments and a cash-in-advance constraint fiat money can be used to implement a Pareto optimum only with type-specific taxation. By contrast, if credit contracts are enforceable, the same allocation can be reached in equilibrium without type specific policy. We argue that the advantages of inside money and the fact that they depend on the capacity of the economy to enforce the repayment of debt direct us toward the study of the institutional infrastructure underlying self-enforcing inside money equilibria.
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Find related papers by JEL classification: E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
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