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Optimal monetary policy in a model of money and credit

Author

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  • Pedro Gomis-Porqueras
  • Daniel R. Sanches

Abstract

The authors study optimal monetary policy in a model in which fiat money and private debt coexist as a means of payment. The credit system is endogenous and allows buyers to relax their cash constraints. However, it is costly for agents to publicly report their trades, which is necessary for the enforcement of private liabilities. If it is too costly for the government to obtain information regarding private transactions, then it relies on the public information generated by the private credit system. If not all private transactions are publicly reported, the government has imperfect public information to implement monetary policy. In this case, the authors show that there is no incentive-feasible policy that can implement the socially efficient allocation. Finally, they characterize the optimal policy for an economy with a low record-keeping cost and a large number of public transactions, which results in a positive long-run inflation rate.

Suggested Citation

  • Pedro Gomis-Porqueras & Daniel R. Sanches, 2010. "Optimal monetary policy in a model of money and credit," Working Papers 11-4, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:11-4
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Samuel Huber & Jaehong Kim, 2017. "An overlapping generations model for monetary policy analysis," ECON - Working Papers 272, Department of Economics - University of Zurich.
    2. repec:eee:dyncon:v:79:y:2017:i:c:p:184-200 is not listed on IDEAS
    3. Régis Breton & Mariana Rojas Breu & Vincent Bignon, 2013. "Monetary Union, Banks and Financial Integration," Post-Print hal-01685888, HAL.
    4. Chao Gu & Fabrizio Mattesini & Randall Wright, 2016. "Money and Credit Redux," Econometrica, Econometric Society, vol. 84, pages 1-32, January.
    5. Huber, Samuel & Kim, Jaehong, 2017. "On the optimal quantity of liquid bonds," Journal of Economic Dynamics and Control, Elsevier, vol. 79(C), pages 184-200.
    6. Gomis-Porqueras, Pedro & Waller, Christopher J., 2017. "Optimal Taxes Under Private Information: The Role of the Inflation Tax," Working Papers 2017-14, Federal Reserve Bank of St. Louis.
    7. Ohik Kwon & Manjong Lee, 2016. "Credit Market Frictions and Coessentiality of Money and Credit," Discussion Paper Series 1602, Institute of Economic Research, Korea University.
    8. Li, Ying-Syuan & Li, Yiting, 2013. "Liquidity and asset prices: A new monetarist approach," Journal of Monetary Economics, Elsevier, vol. 60(4), pages 426-438.
    9. Kui-Wai, Li & Bharat R., Hazari, 2015. "The Possible Tragedy of Quantitative Easing: An IS-LM Approach," MPRA Paper 64652, University Library of Munich, Germany.
    10. Lotz, Sébastien & Zhang, Cathy, 2016. "Money and credit as means of payment: A new monetarist approach," Journal of Economic Theory, Elsevier, vol. 164(C), pages 68-100.
    11. Franz Seitz & Markus A. Schmidt, 2014. "Money In Modern Macro Models: A Review of the Arguments," Journal of Reviews on Global Economics, Lifescience Global, vol. 3, pages 156-174.
    12. Tai-Wei Hu & Luis Araujo, 2015. "Optimal Monetary Interventions in Credit Markets," 2015 Meeting Papers 176, Society for Economic Dynamics.
    13. Zachary Bethune & Guillaume Rocheteau & Peter Rupert, 2015. "Aggregate Unemployment and Household Unsecured Debt," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 77-100, January.
    14. repec:taf:applec:v:49:y:2017:i:21:p:2041-2059 is not listed on IDEAS
    15. Lucy Qian Liu & Liang Wang & Randall Wright, 2015. "Costly Credit and Sticky Prices," Working Papers 201505, University of Hawaii at Manoa, Department of Economics.
    16. Chao Gu & Fabrizio Mattesini & Randall Wright, 2015. "Money and Credit Redux," Working Papers 1508, Department of Economics, University of Missouri.
    17. Araujo, Luis & Camargo, Braz, 2015. "Limited monitoring and the essentiality of money," Journal of Mathematical Economics, Elsevier, vol. 58(C), pages 32-37.
    18. repec:bpj:bejtec:v:17:y:2017:i:2:p:14:n:5 is not listed on IDEAS
    19. repec:dau:papers:123456789/12105 is not listed on IDEAS

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    Keywords

    Monetary policy ; Disclosure of information;

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