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Money and Credit with Limited Commitment


  • Stephen Williamson

    (Washington University in St. Louis)

  • Daniel Sanches

    (Washington University in St. Louis)


We study the interplay among imperfect memory, limited commitment, and theft, in an environment that can support monetary exchange and credit. Imperfect memory makes money useful, but it also permits theft to go undetected, and therefore provides lucrative opportunities for thieves. Limited commitment constrains credit arrangements, and the constraints tend to tighten with imperfect memory, as this mitigates punishment for bad behavior in the credit market. In spite of the fact that theft is a deadweight loss, theft in anonymous transactions can discipline credit market behavior, and can therefore be a good thing. We show that the Friedman rule is in general not feasible, or not optimal if it is feasible, and that there are conditions under which theft exists at the optimum.

Suggested Citation

  • Stephen Williamson & Daniel Sanches, 2008. "Money and Credit with Limited Commitment," 2008 Meeting Papers 502, Society for Economic Dynamics.
  • Handle: RePEc:red:sed008:502

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    References listed on IDEAS

    1. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August.
    2. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    3. Antinolfi, Gaetano & Azariadis, Costas & Bullard, James, 2016. "The Optimal Inflation Target In An Economy With Limited Enforcement," Macroeconomic Dynamics, Cambridge University Press, vol. 20(02), pages 582-600, March.
    4. 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.
    5. David Andolfatto, 2007. "Incentives and the Limits to Deflationary Policy," Discussion Papers dp07-14, Department of Economics, Simon Fraser University.
    6. 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, May.
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    Cited by:

    1. Andolfatto, David, 2010. "Essential interest-bearing money," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1495-1507, July.
    2. David Andolfatto, 2011. "The simple analytics of money and credit in a quasi-linear environment," Working Papers 2011-038, Federal Reserve Bank of St. Louis.
    3. Francesca Carapella & Stephen Williamson, 2015. "Credit Markets, Limited Commitment, and Government Debt," Review of Economic Studies, Oxford University Press, vol. 82(3), pages 963-990.
    4. Mei Dong, 2009. "Money and Costly Credit," 2009 Meeting Papers 404, Society for Economic Dynamics.
    5. Alessandro Marchesiani & Aleksander Berentsen, 2010. "Standing Facilities Versus Open Market Operations: Equivalence Results," 2010 Meeting Papers 929, Society for Economic Dynamics.
    6. Williamson, Stephen, 2009. "Liquidity, Financial Intermediation, and Monetary Policy in a New Monetarist Model," MPRA Paper 20692, University Library of Munich, Germany.

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