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Monetary policy with asset-backed money

Author

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  • David Andolfatto
  • Aleksander Berentsen
  • Christopher Waller

Abstract

We study the use of asset-backed money in a neoclassical growth model with illiquid capital. A mechanism is delegated control of productive capi- tal and issues claims against the revenue it earns. These claims constitute a form of asset-backed money. The mechanism determines (i) the number of claims outstanding, (ii) the dividends paid to claim holders, and (iii) the structure of redemption fees. We find that for capital-rich economies, the first-best allocation can be implemented and price stability is optimal. However, for sufficiently capital-poor economies, achieving the first-best allocation requires a strictly positive rate of inflation. In general, the minimum infiation necessary to implement the first-best allocation is above the Friedman rule and varies with capital wealth.

Suggested Citation

  • David Andolfatto & Aleksander Berentsen & Christopher Waller, 2015. "Monetary policy with asset-backed money," ECON - Working Papers 198, Department of Economics - University of Zurich.
    • Handle: RePEc:zur:econwp:198
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:dyncon:v:89:y:2018:i:c:p:100-116 is not listed on IDEAS
    2. Fernández-Villaverde, Jesús & Sanches, Daniel, 2016. "Can Currency Competition Work?," CEPR Discussion Papers 11095, C.E.P.R. Discussion Papers.
    3. Hajime Tomura, 2014. "Payment Instruments and Collateral in the Interbank Payment System," UTokyo Price Project Working Paper Series 032, University of Tokyo, Graduate School of Economics.

    More about this item

    Keywords

    Limited commitment; asset-backed money; optimal monetary policy;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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