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Money and Dynamic Credit Arrangements with Private Information

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  • Aiyagari, S. Rao

    (University of Rochester)

  • Williamson, Stephen

    ()
    (University of Iowa)

Abstract

We construct a model with private information in which consumers write dynamic contracts with financial intermediaries. A role for money arises due to random limited participation of consumers in the financial market. Without defection constraints, a Friedman rule is optimal, the mean and variability of wealth tend to fall in the steady state, and the welfare effects of inflation are very small. With defection constraints, it is optimal to eliminate currency entirely, the variability of wealth tends to rise with inflation, and the welfare effects of inflation are large.

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Bibliographic Info

Paper provided by University of Iowa, Department of Economics in its series Working Papers with number 97-19.

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Length: 44 Pages
Date of creation: Oct 1997
Date of revision:
Handle: RePEc:uia:iowaec:97-19

Contact details of provider:
Postal: University of Iowa, Department of Economics, Henry B. Tippie College of Business, Iowa City, Iowa 52242
Phone: (319) 335-0829
Fax: (319) 335-1956
Web page: http://tippie.uiowa.edu/economics/
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Related research

Keywords: Money; Credit; Private Information;

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References

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  25. Narayana R. Kocherlakota & Neil Wallace, 1997. "Optimal allocations with incomplete record-keeping and no commitment," Working Papers 578, Federal Reserve Bank of Minneapolis.
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