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Money and Dynamic Credit Arrangements with Private Information

  • S. Rao Aiyagari

    (University of Rochester)

  • Stephen D. Williamson

    (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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File URL: http://econwpa.repec.org/eps/game/papers/9802/9802002.pdf
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Paper provided by EconWPA in its series Game Theory and Information with number 9802002.

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Length: 44 pages
Date of creation: 04 Feb 1998
Date of revision:
Handle: RePEc:wpa:wuwpga:9802002
Note: Type of Document - PDF; to print on Acrobat Reader; pages: 44 ; figures: included
Contact details of provider: Web page: http://econwpa.repec.org

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  10. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22.
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  13. 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.
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  20. Phelan Christopher, 1995. "Repeated Moral Hazard and One-Sided Commitment," Journal of Economic Theory, Elsevier, vol. 66(2), pages 488-506, August.
  21. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
  22. Fudenberg, Drew & Holmstrom, Bengt & Milgrom, Paul, 1990. "Short-term contracts and long-term agency relationships," Journal of Economic Theory, Elsevier, vol. 51(1), pages 1-31, June.
  23. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
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