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Endogenous supply of fiat money

  • Araujo, Luis
  • Camargo, Braz

We consider whether reputation concerns can discipline the behavior of a long-lived self-interested agent who has a monopoly over the provision of fiat money. We obtain that when this agent can commit to a choice of money supply, there is a monetary equilibrium where it never overissues. We show, however, that monetary equilibria with no overissue do not exist when there is no commitment. This happens because the incentives this agent has to maintain a reputation for providing valuable currency disappear once its reputation is high enough. More generally, we prove that in the absence of commitment overissue happens infinitely often in any monetary equilibrium. We conclude by showing that imperfect memory can restore the positive result obtained with commitment.

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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 142 (2008)
Issue (Month): 1 (September)
Pages: 48-72

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Handle: RePEc:eee:jetheo:v:142:y:2008:i:1:p:48-72
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  1. Banks, J.s. & Sunderam, R.K., 1991. "Denumerable-Armed Bandits," RCER Working Papers 277, University of Rochester - Center for Economic Research (RCER).
  2. Ricardo de O. Cavalcanti & Andres Erosa & Ted Temzelides, 1999. "Private money and reserve management in a random-matching model," Discussion Paper / Institute for Empirical Macroeconomics 128, Federal Reserve Bank of Minneapolis.
  3. Williamson, S.D., 1998. "Private Money," Working Papers 98-09, University of Iowa, Department of Economics.
  4. Aoyagi, Masaki, 1998. "Mutual Observability and the Convergence of Actions in a Multi-Person Two-Armed Bandit Model," Journal of Economic Theory, Elsevier, vol. 82(2), pages 405-424, October.
  5. Araujo, Luis & Camargo, Braz, 2006. "Information, learning, and the stability of fiat money," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1571-1591, October.
  6. Klein, Benjamin, 1974. "The Competitive Supply of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(4), pages 423-53, November.
  7. Aleksander Berentsen, . "Time-Consistent Private Supplie of Outside Paper Money," IEW - Working Papers 156, Institute for Empirical Research in Economics - University of Zurich.
  8. Milton Friedman & Anna J. Schwartz, 1987. "Has Government Any Role in Money?," NBER Chapters, in: Money in Historical Perspective, pages 289-314 National Bureau of Economic Research, Inc.
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