Money and Credit with Limited Commitment
AbstractWe study the interplay among imperfect memory, limited commitment, and theft, in an environment that can support monetary exchange and credit. Imperfect memory makes money useful, but it also permits theft to go undetected, and therefore provides lucrative opportunities for thieves. Limited commitment constrains credit arrangements, and the constraints tend to tighten with imperfect memory, as this mitigates punishment for bad behavior in the credit market. In spite of the fact that theft is a deadweight loss, theft in anonymous transactions can discipline credit market behavior, and can therefore be a good thing. We show that the Friedman rule is in general not feasible, or not optimal if it is feasible, and that there are conditions under which theft exists at the optimum.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 502.
Date of creation: 2008
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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- 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.
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