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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.

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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 502.

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Date of creation: 2008
Date of revision:
Handle: RePEc:red:sed008:502
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  1. Andolfatto, David, 2007. "Incentives and the Limits to Deflationary Policy," MPRA Paper 4681, University Library of Munich, Germany.
  2. 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.
  3. James Bullard & Gaetano Antinolfi & Costas Azariadis, 2008. "The optimal inflation target in an economy with limited enforcement," Speech 167, Federal Reserve Bank of St. Louis.
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