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Optimal Monetary Policy in a Model of Money and Credit


The authors study optimal monetary policy in a model in which fiat money and private debt coexist as a means of payment. The credit system is endogenous and allows buyers to relax their cash constraints. However, it is costly for agents to publicly report their trades, which is necessary for the enforcement of private liabilities. If it is too costly for the government to obtain information regarding private transactions, then it relies on the public information generated by the private credit system. If not all private transactions are publicly reported, the government has imperfect public information to implement monetary policy. In this case, the authors show that there is no incentive-feasible policy that can implement the socially efficient allocation. Finally, they characterize the optimal policy for an economy with a low record-keeping cost and a large number of public transactions, which results in a positive long-run inflation rate.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 45 (2013)
Issue (Month): 4 (06)
Pages: 701-730

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Handle: RePEc:mcb:jmoncb:v:45:y:2013:i:4:p:701-730
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  16. Yiting Li, 2011. "Currency and Checking Deposits as Means of Payment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 403-417, April.
  17. Araújo, Luis Fernando de Oliveira & Camargo, Braz Ministério de, 2010. "Limited memory and the essentiality of money," Textos para discussão 221, Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
  18. Wright, Randall, 1999. "Comment on Inside and Outside Money as Alternative Media of Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 461-68, August.
  19. Williamson, Stephen & Sanches, Daniel, 2009. "Money and Credit With Limited Commitment and Theft," MPRA Paper 20690, University Library of Munich, Germany.
  20. David C. Mills, Jr., 2006. "A model in which outside and inside money are essential," Finance and Economics Discussion Series 2006-38, Board of Governors of the Federal Reserve System (U.S.).
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