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Money and finance with costly commitment

Author

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  • Chatterjee, Satyajit
  • Corbae, Dean

Abstract

The authors develop a variant of Townsend's turnpike model where the trading friction is related to a commitment problem rather than spatial separation alone. Specifically, expenditure on financial services is necessary to ensure commitment. When commitment is costless, the equilibrium allocation is equivalent to that from an Arrow sequential markets equilibrium. When commitment is prohibitively expensive, the allocation is similar to the Townsend equilibrium. The authors use numerical examples to study the consequences of costly commitment for co-existence of money and credit, asset pricing, welfare implications of currency and variations in its growth rate, and the relationships between income and financial development.
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Suggested Citation

  • Chatterjee, Satyajit & Corbae, Dean, 1996. "Money and finance with costly commitment," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 225-248, April.
    • Handle: RePEc:eee:moneco:v:37:y:1996:i:2-3:p:225-248
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    References listed on IDEAS

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    1. Bryant, John & Wallace, Neil, 1979. "The Inefficiency of Interest-bearing National Debt," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 365-381, April.
    2. Townsend, Robert M., 1987. "Asset-return anomalies in a monetary economy," Journal of Economic Theory, Elsevier, vol. 41(2), pages 219-247, April.
    3. Ireland, Peter N, 1994. "Money and Growth: An Alternative Approach," American Economic Review, American Economic Association, vol. 84(1), pages 47-65, March.
    4. Satyajit Chatterjee & Dean Corbae, 1994. "Money and finance in a model of costly commitment," Working Papers 94-25, Federal Reserve Bank of Philadelphia.
    5. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
    6. Mitsui, Toshihide & Watanabe, Shinichi, 1989. "Monetary growth in a turnpike environment," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 123-137, July.
    7. Chatterjee, Satyajit & Corbae, Dean, 1992. "Endogenous Market Participation and the General Equilibrium Value of Money," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 615-646, June.
    8. Robert M. Townsend, 1978. "Intermediation with Costly Bilateral Exchange," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 45(3), pages 417-425.
    9. Townsend, Robert M, 1983. "Financial Structure and Economic Activity," American Economic Review, American Economic Association, vol. 73(5), pages 895-911, December.
    10. Manuelli, Rodolfo & Sargent, Thomas J., 2010. "Alternative Monetary Policies In A Turnpike Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 14(5), pages 727-762, November.
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    2. Boerner, Lars & Ritschl, Albrecht, 2010. "Communal responsibility and the coexistence of money and credit under anonymous matching," SFB 649 Discussion Papers 2010-060, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    3. Boerner, Lars Michael & Ritschl, Albrecht, 2010. "Communal responsibility and the coexistence of money and credit under anonymous matching," Economic History Working Papers 121709, London School of Economics and Political Science, Department of Economic History.

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