Intermediaries and payments instruments
We study an economy in which intermediaries have incentives to issue circulating liabilities as part of an equilibrium. We show that, with arbitrarily small transactions costs, only the liabilities of intermediaries will circulate, and not those of other private sector agents. Therefore, our model connects intermediation activity with the issuance of payments media, a connection that has not been made in earlier literature. We also describe conditions under which equilibrium outcomes may be volatile when private liabilities circulate. Finally, we use our model to suggest a resolution of the "banknote underissue puzzle" of Cagan (1993).
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- Stephen D. Williamson, 1984.
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Blackwell Publishing, vol. 31(3), pages 568-89, August.
- Bruce Champ & Scott Freeman & Warren E. Weber, 1999. "Redemption costs and interest rates under the U.S. National Banking System," Proceedings, Federal Reserve Bank of Cleveland, pages 568-595.
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- Bruce Champ & Neil Wallace & Warren Weber, 1993. "Interest Rates Under the U.S. National Banking System," Economic History 9310001, EconWPA.
- Bruce A. Champ & Neil Wallace & Warren E. Weber, 1993. "Interest rates under the U.S. national banking system," Staff Report 161, Federal Reserve Bank of Minneapolis.
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- Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
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