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Money and Dynamic Credit Arrangements with Private Information

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Author Info

  • S. Rao Aiyagari

    (University of Rochester)

  • Stephen D. Williamson

    (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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File URL: http://128.118.178.162/eps/game/papers/9802/9802002.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Game Theory and Information with number 9802002.

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Length: 44 pages
Date of creation: 04 Feb 1998
Date of revision:
Handle: RePEc:wpa:wuwpga:9802002

Note: Type of Document - PDF; to print on Acrobat Reader; pages: 44 ; figures: included
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Web page: http://128.118.178.162

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Keywords: 97-19;

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