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Circulation of Private Notes during a Currency Shortage

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  • Xavier Cuadras Morató

Abstract

This paper provides a search theoretical model that captures two phenomena that have characterized several episodes of monetary history: currency shortages and the circulation of privately issued notes. As usual in these models, the media of exchange are determined as part of the equilibrium. We characterize all the different equilibria and specify the conditions under which there is a currency shortage and/or privately issued notes are used as means of payment. There is multiplicity of equilibria for the entire parameter space, but there always exist an equilibrium in which notes circulate, either alone or together with coins. Hence, credit is a self-fulfilling phenomenon that depends on the beliefs of agents about the acceptability and future repayment of notes. The degree of circulation of coins depends on two crucial parameters, the intrinsic utility of holding coins and the extent with which it is possible to find exchange opportunities in the market.

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  • Xavier Cuadras Morató, 2005. "Circulation of Private Notes during a Currency Shortage," Working Papers 164, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:164
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    References listed on IDEAS

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    Cited by:

    1. Xavier Cuadras‐Morató, 2009. "Circulation Of Private Notes During A Currency Shortage," Manchester School, University of Manchester, vol. 77(4), pages 461-478, July.
    2. Cristian Frasser & Lucie Lebeau, 2023. "Complementary Currencies and Liquidity: The Case of Coca-Base Money," Working Papers 2307, Federal Reserve Bank of Dallas.
    3. Gustavo A. Del Angel, 2016. "Cashless Payments and the Persistence of Cash: Open Questions About Mexico," Economics Working Papers 16108, Hoover Institution, Stanford University.

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    More about this item

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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