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On the inherent instability of private money

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  • Daniel R. Sanches

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.

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  • Daniel R. Sanches, 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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    Cited by:

    1. Hajime Tomura, 2019. "On Separation between Payment and Saving Instruments," Working Papers 1813, Waseda University, Faculty of Political Science and Economics.
    2. Fernández-Villaverde, Jesús & Sanches, Daniel, 2019. "Can currency competition work?," Journal of Monetary Economics, Elsevier, vol. 106(C), pages 1-15.
    3. Gronwald, Marc, 2019. "Is Bitcoin a Commodity? On price jumps, demand shocks, and certainty of supply," Journal of International Money and Finance, Elsevier, vol. 97(C), pages 86-92.
    4. Donaldson, Jason & Piacentino, Giorgia, 2019. "Money Runs," CEPR Discussion Papers 13955, C.E.P.R. Discussion Papers.
    5. 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.
    6. Waknis, Parag, 2017. "Competitive Supply of Money in a New Monetarist Model," MPRA Paper 75401, University Library of Munich, Germany.
    7. Shao, Enchuan & Fung, Ben S.C., 2016. "Counterfeit quality and verification in a monetary exchange," Economic Modelling, Elsevier, vol. 52(PA), pages 13-25.
    8. Jason R. Donaldson & Giorgia Piacentino, 2019. "Money Runs," NBER Working Papers 26298, National Bureau of Economic Research, Inc.
    9. Stephan Imhof & Cyril Monnet & Shengxing Zhang, 2018. "The Risk-Taking Channel of Liquidity Regulations and Monetary Policy," Diskussionsschriften dp1815, Universitaet Bern, Departement Volkswirtschaft.
    10. Olivier Hueber, 2018. "The blockchain and the sidechain innovations for the electronic commerce beyond the Bitcoin's framework," Post-Print hal-01919094, HAL.
    11. Matsuoka, Tarishi, 2022. "Asset prices and standing facilities in a monetary economy," Journal of Economic Dynamics and Control, Elsevier, vol. 135(C).
    12. Hanna Armelius & Carl Andreas Claussen & Scott Hendry, 2020. "Is Central Bank Currency Fundamental to the Monetary System?," Discussion Papers 2020-2, Bank of Canada.
    13. Jamal Bouoiyour & Refk Selmi & Olivier Hueber, 2019. "Low on Trust and High on Risks: Is Sidechain a Good Solution to Bitcoin Problems?," Working Papers hal-02348406, HAL.
    14. Donaldson, Jason Roderick & Piacentino, Giorgia, 2022. "Money runs," Journal of Monetary Economics, Elsevier, vol. 126(C), pages 35-57.
    15. Salter, Alexander & Tarko, Vlad, 2017. "Governing the Financial System: A Theory of Financial Resilience," Working Papers 06954, George Mason University, Mercatus Center.
    16. Joshua Aizenman, 2019. "Macroeconomics Challenges and Resilience of Emerging Market Economies," NBER Working Papers 26361, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Private money; Self-fulfilling crises; Macroeconomic stability;
    All these keywords.

    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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