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Money and Dynamic Credit Arrangements with Private Information

Author

Listed:
  • Aiyagari, S. Rao

    (University of Rochester)

  • Williamson, Stephen

    (University of Iowa)

Abstract

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.

Suggested Citation

  • Aiyagari, S. Rao & Williamson, Stephen, 1997. "Money and Dynamic Credit Arrangements with Private Information," Working Papers 97-19, University of Iowa, Department of Economics.
    • Handle: RePEc:uia:iowaec:97-19
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    Keywords

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    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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