IDEAS home Printed from https://ideas.repec.org/a/eee/dyncon/v181y2025ics0165188925001824.html

Inside money, fraud and self-fulfilling liquidity dry-up

Author

Listed:
  • Park, Jaevin

Abstract

I study the efficiency of issuing inside money under the risk of fraud in a competitive equilibrium. In the model, bankers can issue money with their franchise values and/or by holding real assets, but they can also fake the quality of the asset at a proportional cost. When the supply of assets is scarce and the counterfeiting cost is intermediate, multiple equilibria can arise with a self-fulfilling liquidity dry-up, where the haircut in the collateral transaction increases and aggregate liquidity shrinks simultaneously. This equilibrium allocation is suboptimal because the individual bankers cannot internalize the effect of issuing money on the prices and the pledgeability of the assets in general equilibrium. We find that imposing an entry cost is more effective in correcting pecuniary externality because the counterfeiting incentive can be discouraged by a positive franchise value. Maximum haircut requirements have an advantage of eliminating a self-fulfilling liquidity dry-up.

Suggested Citation

  • Park, Jaevin, 2025. "Inside money, fraud and self-fulfilling liquidity dry-up," Journal of Economic Dynamics and Control, Elsevier, vol. 181(C).
    • Handle: RePEc:eee:dyncon:v:181:y:2025:i:c:s0165188925001824
    DOI: 10.1016/j.jedc.2025.105216
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165188925001824
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jedc.2025.105216?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:181:y:2025:i:c:s0165188925001824. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jedc .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.