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Time-Consistent Private Supplie of Outside Paper Money

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  • Aleksander Berentsen

Abstract

This paper considers a monopolist’s supply of outside paper money in a random-matching model with divisible money and divisible goods. When binding supply announcements are feasible, the revenue-maximizing policy is characterized by an initial period where the monopolist initiates a currency reform which destroys the value of any old currency, and then issues new money, which the issuer taxes thereafter with a constant gross growth rate of money. It is shown that this policy is time-consistent if the trading history of the issuer is public information and if money demanders respond to the relevation of defection by playing autarky.

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Bibliographic Info

Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 156.

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Handle: RePEc:zur:iewwpx:156

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Keywords: Outside Money; Time Consistency; Private Money; Search Equilibrium;

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References

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  1. Kiyotaki, Nobuhiro & Wright, Randall, 1991. "A contribution to the pure theory of money," Journal of Economic Theory, Elsevier, vol. 53(2), pages 215-235, April.
  2. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
  3. Ricardo Cavalcanti & Andres Erosa & Ted Temzelides, 1998. "Private Money and Reserve Management in a Random Matching Model," Macroeconomics 9803008, EconWPA.
  4. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
  5. Shouyong Shi, 1997. "A Divisible Search Model of Fiat Money," Econometrica, Econometric Society, vol. 65(1), pages 75-102, January.
  6. Taub, Bart, 1985. "Private fiat money with many suppliers," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 195-208, September.
  7. Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2003. "How severe is the time-inconsistency problem in monetary policy?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 17-33.
  8. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "A model of private bank-note issue," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 104-136, January.
  9. Klein, Benjamin, 1974. "The Competitive Supply of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(4), pages 423-53, November.
  10. Ritter, Joseph A, 1995. "The Transition from Barter to Fiat Money," American Economic Review, American Economic Association, vol. 85(1), pages 134-49, March.
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Cited by:
  1. Bruno S. Frey & Simon Luechinger & Alois Stutzer, 2004. "Calculating Tragedy: Assessing the Costs of Terrorism," CESifo Working Paper Series 1341, CESifo Group Munich.
  2. Bruno S. Frey & Alois Stutzer, . "Direct Democracy: Designing a Living Constitution," IEW - Working Papers 167, Institute for Empirical Research in Economics - University of Zurich.
  3. Martin, Antoine & Schreft, Stacey L., 2006. "Currency competition: A partial vindication of Hayek," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 2085-2111, November.
  4. Enrico De Giorgi & Stefan Reimann, . "The ?-Beauty Contest: Choosing Numbers, Thinking Intervals," IEW - Working Papers 183, Institute for Empirical Research in Economics - University of Zurich.
  5. Peter Rupert & Martin Schindler & Andrei Shevchenko & Randall Wright, 2000. "The search-theoretic approach to monetary economics: a primer," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 10-28.
  6. Araujo, Luis & Camargo, Braz, 2008. "Endogenous supply of fiat money," Journal of Economic Theory, Elsevier, vol. 142(1), pages 48-72, September.

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