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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Paper provided by University of Iowa, Department of Economics in its series Working Papers with number
97-19.
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/ More information through EDIRC
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Find related papers by JEL classification: D8 - Microeconomics - - Information, Knowledge, and Uncertainty E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
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