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The value of inside and outside money: expanded version

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Abstract

We study dynamic economies in which agents may have incentives to hold both privately-issued (a.k.a. inside) and publicly-issued (a.k.a. outside) circulating liabilities as part of an equilibrium. Our analysis emphasizes spatial separation and limited communication as frictions that motivate monetary exchange. We isolate conditions under which a combination of inside and outside money does and does not allow the economy to achieve a first-best allocation of resources. We also study the extent to which the use of private circulating liabilities alone, or the use of public circulating liabilities alone, can address the frictions that lead to monetary exchange. We identify conditions under which both types of liabilities are essential to efficiency. However, even when these conditions are satisfied, we show that political economy considerations may lead to a prohibition against private circulating liabilities. Finally, we analyze the consequences of such a prohibition for the determinacy of equilibrium, and for endogenously arising volatility.

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  • James B. Bullard & Bruce Smith, 2001. "The value of inside and outside money: expanded version," Working Papers 2001-011, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2001-011
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    References listed on IDEAS

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    Money; Money theory;

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