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Aggregate Uncertainty, Money and Banking

Author

Listed:
  • Hongfei Sun

    (Department of Economics University of Toronto)

Abstract

This paper studies the problem of monitoring the monitor in a model of money and banking with aggregate uncertainty. It shows that when inside money is required as a means of bank loan repayment, a market of inside money is entailed at the repayment stage and generates information-revealing prices that perfectly discipline the bank. The incentive problem of a bank is costlessly overcome simply by involving inside money in repayment. Inside money distinguishes itself from outside money by its inherent ability to provide incentives even on the existence of multiple banks. Thus, in addition to providing liquidity to the economy, inside money contributes to banking by eliminating the cost of monitoring the bank and improving the efficiency of intermediation. Moreover, this model establishes that markets can be a favorable instrument for incentives of truthful revelation

Suggested Citation

  • Hongfei Sun, 2006. "Aggregate Uncertainty, Money and Banking," 2006 Meeting Papers 58, Society for Economic Dynamics.
    • Handle: RePEc:red:sed006:58
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    Cited by:

    1. Cyril Monnet & Daniel R. Sanches, 2015. "Private Money and Banking Regulation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(6), pages 1031-1062, September.
    2. Dong, Mei & Huangfu, Stella & Sun, Hongfei & Zhou, Chenggang, 2021. "A macroeconomic theory of banking oligopoly," European Economic Review, Elsevier, vol. 138(C).
    3. Allen Head & Junfeng Qiu, 2007. "Elastic Money, Inflation, And Interest Rate Policy," Working Paper 1152, Economics Department, Queen's University.
    4. Parag Waknis, 2011. "Monetary Policy under Leviathan Currency Competition," Working papers 2011-21, University of Connecticut, Department of Economics.
    5. Waknis, Parag, 2017. "Competitive Supply of Money in a New Monetarist Model," MPRA Paper 75401, University Library of Munich, Germany.
    6. Amy Hongfei Sun, 2007. "Banking, Inside Money And Outside Money," Working Paper 1146, Economics Department, Queen's University.
    7. Hongfei Sun & Stella Huangfu, 2011. "Private money and bank runs," Canadian Journal of Economics, Canadian Economics Association, vol. 44(3), pages 859-879, August.

    More about this item

    Keywords

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    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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