Banking, Inside Money and Outside Money
This paper presents an integrated theory of money and banking. I address the following question: when both individuals and banks have private information, what is the optimal way to settle debts? I develop a dynamic model with micro-founded roles for banks and a medium of exchange. I establish two main results: first, markets can improve upon the optimal dynamic contract at the presence of private information. Market prices fully reveal the aggregate states and help solve the incentive problem of the bank. Secondly, it is optimal for the bank to require loans be settled with short-term inside money, i.e., bank money that expires immediately after the settlement of debts. Short-term inside money makes it less costly to induce truthful revelation and achieve more efficient risk sharing.
|Date of creation:||Dec 2007|
|Date of revision:|
|Contact details of provider:|| Postal: Kingston, Ontario, K7L 3N6|
Phone: (613) 533-2250
Fax: (613) 533-6668
Web page: http://qed.econ.queensu.ca/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrew Atkeson & Robert E Lucas, 2010.
"On Efficient Distribution with Private Information,"
Levine's Working Paper Archive
2179, David K. Levine.
- Andrew Atkeson & Robert E. Lucas, 1992. "On Efficient Distribution With Private Information," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 427-453.
- Miquel Faig, 2006.
"Divisible Money In An Economy With Villages,"
tecipa-216, University of Toronto, Department of Economics.
- Miquel Faig, 2004. "Divisible Money in an Economy with Villages," Econometric Society 2004 North American Summer Meetings 248, Econometric Society.
- Miquel Faig, 2004. "Divisible Money in an Economy with Villages," Levine's Bibliography 122247000000000159, UCLA Department of Economics.
- Shouyong Shi, 1996.
"Credit and Money in a Search Model with Divisible Commodities,"
Review of Economic Studies,
Oxford University Press, vol. 63(4), pages 627-652.
- Shouyong Shi, 1995. "Credit and Money in a Search Model with Divisible Commodities," Working Papers 917, Queen's University, Department of Economics.
- Aiyagari, S. Rao & Williamson, Stephen D., 2000.
"Money and Dynamic Credit Arrangements with Private Information,"
Journal of Economic Theory,
Elsevier, vol. 91(2), pages 248-279, April.
- S. Rao Aiyagari & Stephen D. Williamson, 1998. "Money and dynamic credit arrangements with private information," Working Paper 9807, Federal Reserve Bank of Cleveland.
- Aiyagari, S. Rao & Williamson, Stephen, 1997. "Money and Dynamic Credit Arrangements with Private Information," Working Papers 97-19, University of Iowa, Department of Economics.
- S. Rao Aiyagari & Stephen D. Williamson, 1998. "Money and Dynamic Credit Arrangements with Private Information," Game Theory and Information 9802002, EconWPA.
- David Andolfatto & Ed Nosal, 2003.
"A Theory of Money and Banking,"
- Stephen Williamson, 2004. "Limited participation, private money, and credit in a spatial model of money," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 24(4), pages 857-875, November.
- Ricardo de O. Cavalcanti & Neil Wallace, 1999.
"Inside and outside money as alternative media of exchange,"
Federal Reserve Bank of Cleveland, pages 443-468.
- Cavalcanti, Ricardo de O & Wallace, Neil, 1999. "Inside and Outside Money as Alternative Media of Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 443-57, August.
- James B. Bullard & Bruce D. Smith, 2001.
"The value of inside and outside money,"
2000-027, Federal Reserve Bank of St. Louis.
- Ping He & Lixin Huang & Randall Wright, 2005. "Money And Banking In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 637-670, 05.
- David Andolfatto & Ed Nosal, 2001. "A simple model of money and banking," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 20-28.
- Phelan Christopher, 1995. "Repeated Moral Hazard and One-Sided Commitment," Journal of Economic Theory, Elsevier, vol. 66(2), pages 488-506, August.
When requesting a correction, please mention this item's handle: RePEc:qed:wpaper:1146. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Babcock)
If references are entirely missing, you can add them using this form.