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Circulation of private notes during a currency shortage

This paper provides a search theoretical model that captures two phenomena that have characterized several episodes of monetary history: currency shortages and the circulation of privately issued notes. As usual in these models, the media of exchange are determined as part of the equilibrium. We characterize all the different equilibria and specify the conditions under which there is a currency shortage and/or privately issued notes are used as means of payment. There is multiplicity of equilibria for the entire parameter space, but there always exist an equilibrium in which notes circulate, either alone or together with coins. Hence, credit is a self-fulfilling phenomenon that depends on the beliefs of agents about the acceptability and future repayment of notes. The degree of circulation of coins depends on two crucial parameters, the intrinsic utility of holding coins and the extent with which it is possible to find exchange opportunities in the market.

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File URL: http://www.econ.upf.edu/docs/papers/downloads/811.pdf
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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 811.

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Date of creation: Mar 2005
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Handle: RePEc:upf:upfgen:811
Contact details of provider: Web page: http://www.econ.upf.edu/

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  1. Francois R. Velde & Warren E. Weber & Randall Wright, . "A Model of Commodity Money, With Application to Gresham's Law and the Debasement Puzzle," CARESS Working Papres 97-7, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  2. Neil Wallace & Ruilin Zhou, 1996. "A model of a currency shortage," Working Papers 569, Federal Reserve Bank of Minneapolis.
  3. Stephen D. Williamson, 1999. "Private money," Proceedings, Federal Reserve Bank of Cleveland, pages 469-499.
  4. Y. Jin & T. Temzelides, 1999. "On the Local Interaction of Money and Credit," Macroeconomics 9905001, EconWPA.
  5. Bullard, James & Smith, Bruce D., 2003. "The value of inside and outside money," Journal of Monetary Economics, Elsevier, vol. 50(2), pages 389-417, March.
  6. James Bullard & Bruce D. Smith, 2002. "Intermediaries and payments instruments," Working Papers 2002-006, Federal Reserve Bank of St. Louis.
  7. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "A model of private bank-note issue," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 104-136, January.
  8. Scott Freeman, 1993. "Clearinghouse banks and banknote over-issue," Research Paper 9326, Federal Reserve Bank of Dallas.
  9. Townsend, Robert M, 1989. "Currency and Credit in a Private Information Economy," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1323-44, December.
  10. Redish, Angela, 1984. "Why Was Specie Scarce in Colonial Economies? An Analysis of the Canadian Currency, 1796–1830," The Journal of Economic History, Cambridge University Press, vol. 44(03), pages 713-728, September.
  11. Bernhardt, Dan, 1989. "Money and Loans," Review of Economic Studies, Wiley Blackwell, vol. 56(1), pages 89-100, January.
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