Legal Restrictions, "Sunspots," and Peel's Bank Act: The Real Bills Doctrine versus the Quantity Theory Reconsidered
This paper considers two questions: (1) what is the purpose of legal restrictions intended to separate "money" fr om "credit markets," and (2) is such a separation desirable? It is argued that historical legal restrictions meant to achieve such a sep aration were designed to preclude the occurrence of sunspot equilibri a. It is also shown that a coherent model can be constructed in which sunspot equilibria exist in the absence of legal restrictions, but n ot if money and credit markets are separated. Nevertheless, there is no obvious welfare justification for such a separation. Copyright 1988 by University of Chicago Press.