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Monetary policy with asset-backed money

Listed author(s):
  • Andolfatto, David
  • Berentsen, Aleksander
  • Waller, Christopher

We study the use of asset-backed money in a neoclassical growth model with illiquid capital. A mechanism is delegated control of productive capital and issues claims against the revenue it earns. These claims constitute a form of asset-backed money. The mechanism determines (i) the number of claims outstanding, (ii) the dividends paid to claim holders, and (iii) the structure of redemption fees. We find that for capital-rich economies, the first-best allocation can be implemented and price stability is optimal. However, for sufficiently capital-poor economies, achieving the first-best allocation requires a strictly positive rate of inflation. In general, the minimum inflation necessary to implement the first-best allocation is decreasing in capital wealth.

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File URL: http://www.sciencedirect.com/science/article/pii/S0022053115001659
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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 164 (2016)
Issue (Month): C ()
Pages: 166-186

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Handle: RePEc:eee:jetheo:v:164:y:2016:i:c:p:166-186
DOI: 10.1016/j.jet.2015.08.006
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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