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Aggregate Uncertainty, Money and Banking

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  • Hongfei Sun

    ()
    (Department of Economics University of Toronto)

Abstract

This paper studies the problem of monitoring the monitor in a model of money and banking with aggregate uncertainty. It shows that when inside money is required as a means of bank loan repayment, a market of inside money is entailed at the repayment stage and generates information-revealing prices that perfectly discipline the bank. The incentive problem of a bank is costlessly overcome simply by involving inside money in repayment. Inside money distinguishes itself from outside money by its inherent ability to provide incentives even on the existence of multiple banks. Thus, in addition to providing liquidity to the economy, inside money contributes to banking by eliminating the cost of monitoring the bank and improving the efficiency of intermediation. Moreover, this model establishes that markets can be a favorable instrument for incentives of truthful revelation

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 58.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:58

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Keywords: Money; Banking; Aggregate Uncertainty;

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  1. Hammond, Peter J, 1987. "Markets as Constraints: Multilateral Incentive Compatibility in Continuum Economies," Review of Economic Studies, Wiley Blackwell, vol. 54(3), pages 399-412, July.
  2. Gorton, Gary B. & Haubrich, Joseph G., 1987. "Bank deregulation, credit markets, and the control of capital," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 26(1), pages 289-333, January.
  3. 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.
  4. Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 159-179, September.
  5. David Andolfatto & Ed Nosal, 2003. "A Theory of Money and Banking," Macroeconomics 0310003, EconWPA.
  6. Shi, Shouyong, 1996. "Credit and Money in a Search Model with Divisible Commodities," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 627-52, October.
  7. Krasa, Stefan & Villamil, Anne P, 1992. "A Theory of Optimal Bank Size," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 725-49, October.
  8. Hammond, Peter J, 1979. "Straightforward Individual Incentive Compatibility in Large Economies," Review of Economic Studies, Wiley Blackwell, vol. 46(2), pages 263-82, April.
  9. Ping He & Lixin Huang & Randall Wright, 2005. "Money And Banking In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 637-670, 05.
  10. Stephen Williamson, 2004. "Limited participation, private money, and credit in a spatial model of money," Economic Theory, Springer, vol. 24(4), pages 857-875, November.
  11. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
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Cited by:
  1. Parag Waknis, 2011. "Monetary Policy under Leviathan Currency Competition," Working papers 2011-21, University of Connecticut, Department of Economics.
  2. Sun, Hongfei, 2007. "Banking, Inside Money and Outside Money," MPRA Paper 4504, University Library of Munich, Germany.
  3. Allen Head & Junfeng Qiu, 2011. "Elastic Money, Inflation, and Interest Rate Policy," Working Papers 1152, Queen's University, Department of Economics.

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