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Nominal contracts and the payment system

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  • Hajime Tomura

    (Waseda University)

Abstract

This paper introduces into an overlapping generations model the civil court’s inability to distinguish different qualities of goods of the same kind. This friction prevents the enforcement of real credit contracts through the civil court. Given this environment, fiat money is introduced into the model as an intrinsically useless, but recognizable instrument for the court. With fiat money, there exists an equilibrium in which agents write pledgeable nominal debt contracts, while fiat money circulates as both a means of debt repayment and a means of payment for goods. This result does not require dynamic inefficiency or lack of double coincidence of wants. However, there can occur a shortage of real money balances for debt repayments, because lenders must pay fiat money for borrowers’ output before receiving the repayment of debt, in order for borrowers to obtain fiat money to repay debt. The central bank can resolve this bottleneck if it provides an elastic money supply through a discount window within each period. These results replicate two institutional features of the current monetary system—that is, fiat money being legal tender and a discount window offered by the central bank—in an unified framework.

Suggested Citation

  • Hajime Tomura, 2021. "Nominal contracts and the payment system," The Japanese Economic Review, Springer, vol. 72(2), pages 185-216, April.
  • Handle: RePEc:spr:jecrev:v:72:y:2021:i:2:d:10.1007_s42973-020-00054-8
    DOI: 10.1007/s42973-020-00054-8
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    1. Two papers on monetary theory where the Friedman Rule is not optimal
      by Christian Zimmermann in NEP-DGE blog on 2021-02-12 19:23:26

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    More about this item

    Keywords

    Nominal contract; Discount window; Trade credit; Payment system; Legal tender;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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