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Optimal Monetary Interventions in Credit Markets

Author

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  • Tai-Wei Hu

    (MEDS)

  • Luis Araujo

    (Michigan State University)

Abstract

In an environment based on Lagos and Wright (2005) but with two rounds of pairwise meetings, we introduce imperfect monitoring that resembles operations of unsecured loans. We characterize the set of implementable allocations satisfying individual rationality and pairwise core in bilateral meetings. We introduce a class of expansionary monetary policies that use the seignorage revenue to purchase privately issued debts that resemble unconventional monetary policies. We show that under the optimal trading mechanism, both money and debt circulate in the economy and the optimal inflation rate is positive, except for very high discount factors under which money alone achieves the first-best. Our model captures the view that unconventional monetary policy encourages lending while it may create inflation.

Suggested Citation

  • Tai-Wei Hu & Luis Araujo, 2015. "Optimal Monetary Interventions in Credit Markets," 2015 Meeting Papers 176, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:176
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    References listed on IDEAS

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    1. Tai-wei Hu & John Kennan & Neil Wallace, 2009. "Coalition-Proof Trade and the Friedman Rule in the Lagos-Wright Model," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 116-137, February.
    2. Ricardo de O. Cavalcanti & Andres Erosa & Ted Temzelides, 1999. "Private Money and Reserve Management in a Random-Matching Model," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 929-945, October.
    3. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "Inside and outside money as alternative media of exchange," Proceedings, Federal Reserve Bank of Cleveland, pages 443-468.
    4. Sanches, Daniel & Williamson, Stephen, 2010. "Money and credit with limited commitment and theft," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1525-1549, July.
    5. Wallace, Neil, 2010. "The Mechanism-Design Approach to Monetary Theory," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 1, pages 3-23 Elsevier.
    6. Irina A. Telyukova & Randall Wright, 2008. "A Model of Money and Credit, with Application to the Credit Card Debt Puzzle," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 629-647.
    7. Gertler, Mark & Kiyotaki, Nobuhiro, 2010. "Financial Intermediation and Credit Policy in Business Cycle Analysis," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 11, pages 547-599 Elsevier.
    8. Lotz, Sébastien & Zhang, Cathy, 2016. "Money and credit as means of payment: A new monetarist approach," Journal of Economic Theory, Elsevier, vol. 164(C), pages 68-100.
    9. Pedro Gomis‐Porqueras & Daniel Sanches, 2013. "Optimal Monetary Policy in a Model of Money and Credit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(4), pages 701-730, June.
    10. repec:mcb:jmoncb:v:45:y:2013:i::p:701-730 is not listed on IDEAS
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    Cited by:

    1. Guillaume Rocheteau & Randall Wright & Cathy Zhang, 2018. "Corporate Finance and Monetary Policy," American Economic Review, American Economic Association, vol. 108(4-5), pages 1147-1186, April.
    2. Lotz, Sébastien & Zhang, Cathy, 2016. "Money and credit as means of payment: A new monetarist approach," Journal of Economic Theory, Elsevier, vol. 164(C), pages 68-100.
    3. Lucy Qian Liu & Liang Wang & Randall Wright, 2015. "Costly Credit and Sticky Prices," Working Papers 201505, University of Hawaii at Manoa, Department of Economics.
    4. Moccia, Luigi & Laporte, Gilbert, 2016. "Improved models for technology choice in a transit corridor with fixed demand," Transportation Research Part B: Methodological, Elsevier, vol. 83(C), pages 245-270.

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