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Money and Credit with Limited Commitment

Author

Listed:
  • Stephen Williamson

    (Washington University in St. Louis)

  • Daniel Sanches

    (Washington University in St. Louis)

Abstract

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

    as
    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. 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.
    4. Antinolfi, Gaetano & Azariadis, Costas & Bullard, James, 2016. "The Optimal Inflation Target In An Economy With Limited Enforcement," Macroeconomic Dynamics, Cambridge University Press, vol. 20(2), pages 582-600, March.
    5. Guillaume Rocheteau & Randall Wright, 2005. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 73(1), pages 175-202, January.
    6. David Andolfatto, 2007. "Incentives and the Limits to Deflationary Policy," Discussion Papers dp07-14, Department of Economics, Simon Fraser University.
    7. 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. 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.
    2. Mei Dong, 2009. "Money and Costly Credit," 2009 Meeting Papers 404, Society for Economic Dynamics.
    3. Alessandro Marchesiani & Aleksander Berentsen, 2010. "Standing Facilities Versus Open Market Operations: Equivalence Results," 2010 Meeting Papers 929, Society for Economic Dynamics.
    4. Berentsen, Aleksander & Monnet, Cyril, 2008. "Monetary policy in a channel system," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1067-1080, September.
    5. Andolfatto, David, 2010. "Essential interest-bearing money," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1495-1507, July.
    6. Williamson, Stephen, 2009. "Liquidity, Financial Intermediation, and Monetary Policy in a New Monetarist Model," MPRA Paper 20692, University Library of Munich, Germany.
    7. Fabrizio Mattesini & Cyril Monnet & Randall Wright, 2009. "Banking: a mechanism design approach," Working Papers 09-26, Federal Reserve Bank of Philadelphia.
    8. Francesca Carapella & Stephen Williamson, 2015. "Credit Markets, Limited Commitment, and Government Debt," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(3), pages 963-990.

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