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On the inherent instability of private money

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  • Sanches, Daniel R.

    (Federal Reserve Bank of Philadelphia)

Abstract

A primary concern in monetary economics is whether a purely private monetary regime is consistent with macroeconomic stability. I show that a competitive regime is inherently unstable due to the properties of endogenously determined limits on private money creation. Precisely, there is a continuum of equilibria characterized by a self-fulfilling collapse of the value of private money and a persistent decline in the demand for money. I associate these equilibrium allocations with self-fulfilling banking crises. It is possible to formulate a fiscal intervention that results in the global determinacy of equilibrium, with the property that the value of private money remains stable. Thus, the goal of monetary stability necessarily requires some form of government intervention.

Suggested Citation

  • Sanches, Daniel R., 2015. "On the inherent instability of private money," Working Papers 15-18, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:15-18
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    References listed on IDEAS

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    Cited by:

    1. Jess Benhabib & Jianjun Miao & Pengfei Wang, 2016. "Chaotic banking crises and regulations," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(2), pages 393-422, February.
    2. Jesús Fernández-Villaverde & Daniel Sanches, 2016. "Can Currency Competition Work?," NBER Working Papers 22157, National Bureau of Economic Research, Inc.
    3. Waknis, Parag, 2017. "Competitive Supply of Money in a New Monetarist Model," MPRA Paper 75401, University Library of Munich, Germany.

    More about this item

    Keywords

    Private money; Self-fulfilling crises; Macroeconomic stability;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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