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Nominal Contracts and the Payment System

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  • Hajime Tomura

    (Faculty of Political Science and Economics, Waseda University)

Abstract

This paper introduces into an overlapping generations model the courts inability to distinguish different qualities of goods of the same kind. Given the recognizability of fiat money for the court, this friction leads to the use of nominal debt contracts as well as the use of fiat money as a means of payment in the goods market. This result holds without dynamic inefficiency or lack of double coincidence of wants. Instead, money is necessary because it is essential for credit. However, there can occur a shortage of real money balances for liability settlements, even if the money supply follows a Friedman rule. This problem can be resolved if the central bank can lend fiat money to agents elastically at a zero intraday interest rate within each period. Given the economy being dynamically efficient, this policy makes the money supply cease to be the nominal anchor for the price level. In this case, the monetary steady state becomes compatible with other nominal anchors than the money supply.

Suggested Citation

  • Hajime Tomura, 2020. "Nominal Contracts and the Payment System," Working Papers 1923, Waseda University, Faculty of Political Science and Economics.
    • Handle: RePEc:wap:wpaper:1923
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    References listed on IDEAS

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    1. Two papers on monetary theory where the Friedman Rule is not optimal
      by Christian Zimmermann in NEP-DGE blog on 2021-02-12 19:23:26

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    More about this item

    Keywords

    Nominal contract; Discount window; Trade credit; Cashless economy; Payment system; Legal tender;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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