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The theory of fiat money and private money as alternative media of exchange

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  • Li, Yan

Abstract

A random-matching model with a clearinghouse is constructed to investigate the impact of private money on economic efficiency and social welfare in three monetary regimes. A subset of agents, called bankers, whose credit histories are recorded by the clearinghouse, are allowed to issue private banknotes in order to consume. Those private liabilities may serve as media of exchange, either by themselves, or alongside a stock of fiat money. Under certain conditions, welfare in a monetary steady state with private money is strictly higher than that attained in a steady state where private money is prohibited.

Suggested Citation

  • Li, Yan, 2009. "The theory of fiat money and private money as alternative media of exchange," International Review of Economics & Finance, Elsevier, vol. 18(4), pages 568-582, October.
  • Handle: RePEc:eee:reveco:v:18:y:2009:i:4:p:568-582
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    References listed on IDEAS

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    1. Ricardo de O. Cavalcanti & Andres Erosa & Ted Temzelides, 1999. "Private Money and Reserve Management in a Random-Matching Model," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 929-945, October.
    2. Williamson, Stephen D, 1999. "Private Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 469-491, August.
    3. Rao Aiyagari, S. & Wallace, Neil & Wright, Randall, 1996. "Coexistence of money and interest-bearing securities," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 397-419, June.
    4. Bruce D. Smith & Warren E. Weber, 1999. "Private money creation and the Suffolk Banking System," Proceedings, Federal Reserve Bank of Cleveland, pages 624-667.
    5. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "Inside and outside money as alternative media of exchange," Proceedings, Federal Reserve Bank of Cleveland, pages 443-468.
    6. Bullard, James & Smith, Bruce D., 2003. "The value of inside and outside money," Journal of Monetary Economics, Elsevier, vol. 50(2), pages 389-417, March.
    7. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
    8. 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.
    9. Temzelides, Ted & Williamson, Stephen D., 2001. "Private money, settlement, and discounts," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 54(1), pages 85-108, June.
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    Cited by:

    1. Waknis, Parag, 2017. "Competitive Supply of Money in a New Monetarist Model," MPRA Paper 75401, University Library of Munich, Germany.
    2. Yilmaz, Ensar & √únveren, Burak, 2011. "Income distribution and exchange in a dynamic search model," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 665-678, October.
    3. Li, Yan & Carroll, Wayne, 2011. "The payment mechanisms and liquidity effects," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 656-667.

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