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E-money: Legal Restrictions Theory and Monetary Policy

Author

Listed:
  • Ohik Kwon

    () (Economic Research Institute, The Bank of Korea)

  • Jaevin Park

    () (Department of Economics, The University of Mississippi)

Abstract

This paper studies the efficiency of electronic money system by focusing on the decentralized setting of issuance. In the model competitive money issuers can create small denominated money (or e-money) backed by large denominated government bonds. Under the decentralized environment the issuers can also produce counterfeit collateral at a proportional cost. This moral hazard incentive requires the more government bonds for the issuers to provide the same amount of money. In general equilibrium the individual money issuers do not internalize the aggregate effect of money supply. Thus the equilibrium allocation is constrained inefficient with the moral hazard incentives. We suggest a pigouvian tax on money supply to correct the externality in aggregate money supply.

Suggested Citation

  • Ohik Kwon & Jaevin Park, 2018. "E-money: Legal Restrictions Theory and Monetary Policy," Working Papers 2018-17, Economic Research Institute, Bank of Korea.
  • Handle: RePEc:bok:wpaper:1817
    as

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    File URL: http://papers.bok.or.kr/RePEc_attach/wpaper/english/wp-2018-17.pdf
    File Function: Working Paper, 2018
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    References listed on IDEAS

    as
    1. Hyeongwoo Kim & Hyun Hak Kim & Wen Shi, 2015. "Forecasting Financial Stress Indices in Korea: A Factor Model Approach," Working Papers 2015-30, Economic Research Institute, Bank of Korea.
    2. Cyril Monnet & Daniel R. Sanches, 2015. "Private Money and Banking Regulation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(6), pages 1031-1062, September.
    3. Hyunju Kang & Bok-Keun Yu & Jongmin Yu, 2016. "Global Liquidity and Commodity Prices," Review of International Economics, Wiley Blackwell, vol. 24(1), pages 20-36, February.
    4. Jieun Lee & Jung-Min Kim & Jong Kook Shin, 2016. "US Interest Rate Policy Spillover and International Capital Flow: Evidence from Korea," Working Papers 2016-21, Economic Research Institute, Bank of Korea.
    5. Yiting Li & Guillaume Rocheteau & Pierre-Olivier Weill, 2012. "Liquidity and the Threat of Fraudulent Assets," Journal of Political Economy, University of Chicago Press, vol. 120(5), pages 000.
    6. Neil Wallace, 1983. "A legal restrictions theory of the demand for "money" and the role of monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
    7. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-274, June.
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    1. repec:bla:ausecr:v:51:y:2018:i:4:p:540-550 is not listed on IDEAS

    More about this item

    Keywords

    Limited Commitment; Moral Hazard; Externality; Open-market Operations;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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