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An Idealized View of Financial Intermediation

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  • Sissoko, Carolyn

Abstract

Using the monetary model developed in Sissoko (2007), where the general equilibrium assumption that every agent buys and sells simultaneously is relaxed, we observe that in this environment fiat money can implement a Pareto optimum only if taxes are type-specific. We then consider intermediated money by assuming that financial intermediaries whose liabilities circulate as money have an important identifying characteristic: they are widely viewed as default-free. The paper demonstrates that default-free intermediaries who issue credit lines to consumers can resolve the monetary problem and make it possible for the economy to reach a Pareto optimum. We argue that our idealized concept of financial intermediation is a starting point for studying the monetary use of credit.

Suggested Citation

  • Sissoko, Carolyn, 2007. "An Idealized View of Financial Intermediation," Economics Discussion Papers 2007-16, Kiel Institute for the World Economy (IfW).
  • Handle: RePEc:zbw:ifwedp:5530
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    References listed on IDEAS

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    1. Edward J. Green & Ruilin Zhou, 2005. "Money As A Mechanism In A Bewley Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 351-371, May.
    2. Williamson, Stephen D, 1999. "Private Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 469-491, August.
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    4. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "Inside and outside money as alternative media of exchange," Proceedings, Federal Reserve Bank of Cleveland, pages 443-468.
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    7. 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.
    8. Carolyn Sissoko, 2007. "Why Inside Money Matters," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 2097-2105, December.
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    13. Berentsen, Aleksander & Camera, Gabriele & Waller, Christopher, 2007. "Money, credit and banking," Journal of Economic Theory, Elsevier, vol. 135(1), pages 171-195, July.
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    16. 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.
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    More about this item

    Keywords

    Fiat Money; Cash-in-advance; Financial Intermediation;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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