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Inside Outside Money Competition

We study how competition from privately supplied currency substitutes a¤ects monetary policy. We focus on regimes where monetary policy must be sequentially optimal. We obtain that the workings of competition between currency and currency substitutes depend critically on government objectives. However, the impact inside money competition has on equilibrium outcomes does not. In fact, we show that, in general, it enhances e¢ciency and reduces equilibrium in‡ation rates. Nevertheless, if the supply of “inside monies” is very e¢cient, then the equilibrium with currency may not be sustainable and only “inside money” will be held in equilibrium.

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File URL: http://www.utdt.edu/download.php?fname=_116465292654013700.pdf
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Paper provided by Universidad Torcuato Di Tella in its series Department of Economics Working Papers with number 004.

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Length: 27 pages
Date of creation: Mar 2001
Date of revision:
Handle: RePEc:udt:wpecon:004
Contact details of provider: Web page: http://www.utdt.edu/ver_contenido.php?id_contenido=439&id_item_menu=568

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  1. DREZE, Jacques & POLEMARCHAKIS, Heracles, 2000. "Monetary equilibria," CORE Discussion Papers 2000044, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. V.V. Chari & Patrick J. Kehoe, 1989. "Sustainable plans," Staff Report 122, Federal Reserve Bank of Minneapolis.
  3. Michael Woodford, 1997. "Doing Without Money: Controlling Inflation in a Post-Monetary World," NBER Working Papers 6188, National Bureau of Economic Research, Inc.
  4. David Humphrey & Magnus Willesson & Goran Bergendahl & Ted Lindblom, 2003. "Cost savings from electronic payments and ATMs in Europe," Working Papers 03-16, Federal Reserve Bank of Philadelphia.
  5. Svensson, Lars E O, 1985. "Money and Asset Prices in a Cash-in-Advance Economy," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 919-44, October.
  6. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-96, March.
  7. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, vol. 46(6), pages 1411-28, November.
  8. Chari, V V & Kehoe, Patrick J, 1993. "Sustainable Plans and Mutual Default," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 175-95, January.
  9. Taub, Bart, 1985. "Private fiat money with many suppliers," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 195-208, September.
  10. Atkinson, A. B. & Stiglitz, J. E., 1972. "The structure of indirect taxation and economic efficiency," Journal of Public Economics, Elsevier, vol. 1(1), pages 97-119, April.
  11. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
  12. Marimon, R. & Nicolini, J.P. & Teles, P., 1999. "Competition and Reputation," Economics Working Papers eco99/18, European University Institute.
  13. Klein, Benjamin, 1974. "The Competitive Supply of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(4), pages 423-53, November.
  14. David B. Humphrey & Lawrence B. Pulley & Jukka M. Vesala, 1996. "Cash, paper, and electronic payments: a cross-country analysis," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 914-941.
  15. V.V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimality of the Friedman rule in economies with distorting taxes," Staff Report 158, Federal Reserve Bank of Minneapolis.
  16. Juan P. Nicolini, 1993. "More on the time inconsistency of optimal monetary policy," Economics Working Papers 56, Department of Economics and Business, Universitat Pompeu Fabra.
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