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Optimal public money

  • Monnet, Cyril

In most countries, the supply of paper money is controlled by a state institution. This paper provides an explanation for why such an arrangement is typically chosen. I use a deterministic matching model with a continuum of agents where enforcement is limited and where some agents produce public goods. Agents can also, at a cost, produce a distinguishable, intrinsically useless but perfectly durable good: notes. I call a note public if it is printed by an agent who produces public goods. In this framework, I prove that the socially optimal allocation is only implemented by a pattern of trade in which exchanges are effected using public notes. JEL Classification: D8, E5

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Paper provided by European Central Bank in its series Working Paper Series with number 0159.

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Date of creation: Jul 2002
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Handle: RePEc:ecb:ecbwps:20020159
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  1. Williamson, S.D., 1998. "Private Money," Working Papers 98-09, University of Iowa, Department of Economics.
  2. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "Inside and outside money as alternative media of exchange," Proceedings, Federal Reserve Bank of Cleveland, pages 443-468.
  3. Ricardo Cavalcanti & Andres Erosa & Ted Temzelides, 1997. "Private money and reserve management in a random matching model," Working Papers 97-24, Federal Reserve Bank of Philadelphia.
  4. Narayana R. Kocherlakota, 1996. "Money is memory," Staff Report 218, Federal Reserve Bank of Minneapolis.
  5. Dean Corbae & Ted Temzelides & Randall Wright, 2002. "Matching and Money," American Economic Review, American Economic Association, vol. 92(2), pages 67-71, May.
  6. Azariadis, Costas & Bullard, James & Smith, Bruce D., 2001. "Private and Public Circulating Liabilities," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 59-116, July.
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