IDEAS home Printed from https://ideas.repec.org/p/bfr/banfra/345.html
   My bibliography  Save this paper

Debt enforcement and the return on money

Author

Listed:
  • Rojas-Breu, M.

Abstract

The rate-of-return-dominance puzzle asks why low-return assets, like fiat money, are used in actual economies given that risk-free higher-return assets are available. As long as this question remains unresolved, most conclusions from monetary models which arbitrarily restrict the marketability properties of alternative assets to make money valuable are difficult to assess. In this paper, I provide a framework in which fiat money has value in equilibrium, even though a higher-return asset is available and there are neither restrictions nor transaction costs in using it. I suggest that the use of money is associated with frictions underlying debt contracts. In an environment where full enforcement is not feasible, the actual rate of return on assets is determined by incentives eliciting voluntary debt repayment. I show that the inflation rate or, more generally, the depreciation rate of an asset in which debts are denominated may function as a commitment device. As a result, money is used in equilibrium and the optimal inflation rate is positive.

Suggested Citation

  • Rojas-Breu, M., 2011. "Debt enforcement and the return on money," Working papers 345, Banque de France.
  • Handle: RePEc:bfr:banfra:345
    as

    Download full text from publisher

    File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/working-paper_345_2011.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Díaz, Antonia & Perera-Tallo, Fernando, 2011. "Credit and inflation under borrowerʼs lack of commitment," Journal of Economic Theory, Elsevier, vol. 146(5), pages 1888-1914, September.
    2. Berentsen, Aleksander & Camera, Gabriele & Waller, Christopher, 2007. "Money, credit and banking," Journal of Economic Theory, Elsevier, vol. 135(1), pages 171-195, July.
    3. Zhu, Tao & Wallace, Neil, 2007. "Pairwise trade and coexistence of money and higher-return assets," Journal of Economic Theory, Elsevier, vol. 133(1), pages 524-535, March.
    4. Christian Hellwig & Guido Lorenzoni, 2009. "Bubbles and Self-Enforcing Debt," Econometrica, Econometric Society, vol. 77(4), pages 1137-1164, July.
    5. Fernando Alvarez & Urban J. Jermann, 2000. "Efficiency, Equilibrium, and Asset Pricing with Risk of Default," Econometrica, Econometric Society, vol. 68(4), pages 775-798, July.
    6. Timothy J. Kehoe & David K. Levine, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 865-888.
    7. Aiyagari, S. Rao & Williamson, Stephen D., 2000. "Money and Dynamic Credit Arrangements with Private Information," Journal of Economic Theory, Elsevier, vol. 91(2), pages 248-279, April.
    8. Lagos, Ricardo, 2010. "Asset prices and liquidity in an exchange economy," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 913-930, November.
    9. Hellwig, Martin F., 1993. "The challenge of monetary theory," European Economic Review, Elsevier, vol. 37(2-3), pages 215-242, April.
    10. Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 118-141, February.
    11. Díaz, Antonia & Perera-Tallo, Fernando, 2007. "Credit and inflation under borrower’s lack of commitment," UC3M Working papers. Economics we077946, Universidad Carlos III de Madrid. Departamento de Economía.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Money; Inflation; Debt Enforcement; Banking.;

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bfr:banfra:345. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael brassart). General contact details of provider: http://edirc.repec.org/data/bdfgvfr.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.