Circulation of Private Notes during a Currency Shortage
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.
|Date of creation:||Mar 2005|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +34 93 542-1222
Fax: +34 93 542-1223
Web page: http://www.barcelonagse.eu
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- James Bullard & Bruce D. Smith, 2001.
"The value of inside and outside money,"
2000-027, Federal Reserve Bank of St. Louis.
- Freeman, Scott, 1996.
"Clearinghouse banks and banknote over-issue,"
Journal of Monetary Economics,
Elsevier, vol. 38(1), pages 101-115, August.
- Neil Wallace & Ruilin Zhou, 1996.
"A model of a currency shortage,"
569, Federal Reserve Bank of Minneapolis.
- Redish, Angela, 1984. "Why Was Specie Scarce in Colonial Economies? An Analysis of the Canadian Currency, 1796–1830," The Journal of Economic History, Cambridge University Press, vol. 44(03), pages 713-728, September.
- Francois R. Velde & Warren E. Weber & Randall Wright, .
"A Model of Commodity Money, With Application to Gresham's Law and the Debasement Puzzle,"
CARESS Working Papres
97-7, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
- François R. Velde & Warren E. Weber & Randall Wright, 1999. "A Model of Commodity Money, with Applications to Gresham's Law and the Debasement Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 291-323, January.
- Francois R. Velde & Warren E. Weber & Randall Wright, 1997. "A model of commodity money, with applications to Gresham's law and the debasement puzzle," Staff Report 215, Federal Reserve Bank of Minneapolis.
- Francois R. Velde & Warren E. Weber & Randall Wright, 1997. "A model of commodity money, with applications to Gresham's Law and the debasement puzzle," Working Paper Series, Macroeconomic Issues WP-97-12, Federal Reserve Bank of Chicago.
- Jin, Yi & Temzelides, Ted, 1998.
"On the Local Interaction of Money and Credit,"
99-05, University of Iowa, Department of Economics.
- Dan Bernhardt, 1985.
"Money and Loans,"
643, Queen's University, Department of Economics.
- James Bullard & Bruce D. Smith, 2002.
"Intermediaries and payments instruments,"
2002-006, Federal Reserve Bank of St. Louis.
- Williamson, Stephen D, 1999.
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 31(3), pages 469-91, August.
- Townsend, Robert M, 1989. "Currency and Credit in a Private Information Economy," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1323-44, December.
- Ricardo de O. Cavalcanti & Neil Wallace, 1999. "A model of private bank-note issue," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 104-136, January.
When requesting a correction, please mention this item's handle: RePEc:bge:wpaper:164. 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: (Bruno Guallar)
If references are entirely missing, you can add them using this form.