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Money and Dynamic Credit Arrangements with Private Information

Listed author(s):
  • Aiyagari, S. Rao

    (University of Rochester)

  • Williamson, Stephen

    ()

    (University of Iowa)

We construct a model with private information in which consumers write dynamic contracts with financial intermediaries. A role for money arises due to random limited participation of consumers in the financial market. Without defection constraints, a Friedman rule is optimal, the mean and variability of wealth tend to fall in the steady state, and the welfare effects of inflation are very small. With defection constraints, it is optimal to eliminate currency entirely, the variability of wealth tends to rise with inflation, and the welfare effects of inflation are large.

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Paper provided by University of Iowa, Department of Economics in its series Working Papers with number 97-19.

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Length: 44 Pages
Date of creation: Oct 1997
Handle: RePEc:uia:iowaec:97-19
Contact details of provider: Postal:
University of Iowa, Department of Economics, Henry B. Tippie College of Business, Iowa City, Iowa 52242

Phone: (319) 335-0829
Fax: (319) 335-1956
Web page: http://tippie.uiowa.edu/economics/

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  14. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 659-684.
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  23. Allen, Franklin, 1985. "Repeated principal-agent relationships with lending and borrowing," Economics Letters, Elsevier, vol. 17(1-2), pages 27-31.
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  25. Thomas, Jonathan & Worrall, Tim, 1990. "Income fluctuation and asymmetric information: An example of a repeated principal-agent problem," Journal of Economic Theory, Elsevier, vol. 51(2), pages 367-390, August.
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  27. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
  28. Narayana R. Kocherlakota, 1996. "Implications of Efficient Risk Sharing without Commitment," Review of Economic Studies, Oxford University Press, vol. 63(4), pages 595-609.
  29. Phelan Christopher, 1995. "Repeated Moral Hazard and One-Sided Commitment," Journal of Economic Theory, Elsevier, vol. 66(2), pages 488-506, August.
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