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23
Money and Banking in Search Equilibrium
- International Economic Review
, 2005
"... This paper develops a new theory of money and banking based on an old story about money and banking. The story is that bankers originally accepted deposits for safe keeping; then their liabilities began to circulate as means of payment (bank notes or checks). We develop models where money is a mediu ..."
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Cited by 27 (6 self)
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This paper develops a new theory of money and banking based on an old story about money and banking. The story is that bankers originally accepted deposits for safe keeping; then their liabilities began to circulate as means of payment (bank notes or checks). We develop models where money is a medium of exchange, but subject to theft, where theft may be exogenous or endogenous. We analyze how the equilibrium circulation of cash and demand deposits varies with the cost of banking and the outside money supply. We study cases with 100 % reserves and with fractional reserves. We thank Ken Burdett, Ed Nosal, Peter Rupert, Joseph Haubrich, Warren Weber, Francois Velde, Steve Quinn and Larry Neal for suggestions or comments. We thank the NSF and the Federal Reserve Bank of Cleveland for ¯nancial support. The usual disclaimer applies. 1 The theory of banking relates primarily to the operation of commercial banking. More especially it is chie°y concerned with the activities of banks as holders of deposit accounts against which cheques are drawn for the payment of goods and services. In Anglo-Saxon countries, and in other countries where economic life is highly developed, these cheques constitute the major part of circulating medium. EB (1954, vol.3, p.49). 1
New Monetarist Economics: Models
, 2010
"... The purpose of this paper is to discuss some of the models used in New Monetarist Economics, which is our label for a body of recent work on money, banking, payments systems, asset markets, and related topics. A key principle in New Monetarism is that solid microfoundations are critical for understa ..."
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Cited by 26 (8 self)
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The purpose of this paper is to discuss some of the models used in New Monetarist Economics, which is our label for a body of recent work on money, banking, payments systems, asset markets, and related topics. A key principle in New Monetarism is that solid microfoundations are critical for understanding monetary issues. We survey recent papers on monetary theory, showing how they build on common foundations. We then lay out a tractable benchmark version of the model that allows us to address a variety of issues. We use it to analyze some classic economic topics, like the welfare effects of inflation, the relationship between money and capital accumulation, and the Phillips curve. We also extend the benchmark model in new ways, and show how it can be used to generate new insights in the study of payments, banking, and asset markets.
Limited Participation, Private Money, and Credit in a Spatial Model of Money,” Economic Theory 24
, 2004
"... Summary. The purpose of this paper is to explore the implications of private money issue for the effects of monetary policy, for optimal policy, and for the role of fiat money. A locational model is constructed which gives an explicit account of the role for money and credit, and for limited financi ..."
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Cited by 13 (0 self)
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Summary. The purpose of this paper is to explore the implications of private money issue for the effects of monetary policy, for optimal policy, and for the role of fiat money. A locational model is constructed which gives an explicit account of the role for money and credit, and for limited financial market participation. When private money issue is prohibited, there is a liquidity effect as the result of a money injection from the central bank, but this effect goes away when private money is permitted. Private money issue changes dramatically the nature of optimal monetary policy. With private money, fiat currency is no longer used in transactions involving goods, but currency and central bank reserves play an important part in the clearing and settlement of private money returned for redemption.
Currency Competition: A Partial Vindication of Hayek
- Journal of Monetary Economics
"... Abstract: This paper establishes the existence of equilibria for environments in which outside money is issued competitively. Such equilibria are typically believed not to exist because of a classic overissue problem: if money is valued in equilibrium, an issuer produces money until its value is dri ..."
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Cited by 9 (0 self)
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Abstract: This paper establishes the existence of equilibria for environments in which outside money is issued competitively. Such equilibria are typically believed not to exist because of a classic overissue problem: if money is valued in equilibrium, an issuer produces money until its value is driven to zero. By backward induction, money cannot have value in the first place. This paper shows that overissuance is not a problem if agents believe that if an issuer produces more than some threshold number of notes, then only those notes issued up to the threshold will be valued; additional notes will be worthless. This result is very general, applying to any monetary economy in which equilibria with and without valued money exist if the money supply is finite. The paper also compares the allocation achieved by a monopolist to that achieved with competitive issuance in both a search and an overlapping-generations environment. The results depend on the environment considered, but two general conclusions arise. First, it is ambiguous whether competitive issuers can achieve a more desirable allocation than a monopolist. Second, with competitive issuance, a licensing agency can always improve on pure laissez-faire and achieve the efficient allocation in the long run.
New Monetarist Economics: Methods
, 2010
"... This essay articulates the principles and practices of New Monetarism, our label for a recent body of work on money, banking, payments, and asset markets. We first discuss methodological issues distinguishing our approach from others: New Monetarism has something in common with Old Monetarism, but t ..."
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Cited by 6 (2 self)
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This essay articulates the principles and practices of New Monetarism, our label for a recent body of work on money, banking, payments, and asset markets. We first discuss methodological issues distinguishing our approach from others: New Monetarism has something in common with Old Monetarism, but there are also important differences; it has little in common with Keynesianism. We describe the principles of these schools and contrast them with our approach. To show how it works, in practice, we build a benchmark New Monetarist model, and use it to study several issues, including the cost of inflation, liquidity and asset trading. We also develop a new model of banking.
Another Example of a Credit System that Co-exists with Money
- Journal of Money, Credit, and Banking
, 2008
"... We study an economy in which exchange occurs pairwise, there is no commitment, and anonymous agents choose between random monetary trade or deterministic credit trade. To accomplish the latter, agents can exploit a costly technology that allows limited record-keeping and enforcement. An equilibrium ..."
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Cited by 3 (1 self)
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We study an economy in which exchange occurs pairwise, there is no commitment, and anonymous agents choose between random monetary trade or deterministic credit trade. To accomplish the latter, agents can exploit a costly technology that allows limited record-keeping and enforcement. An equilibrium with money and credit is shown to exist if the cost of using the technology is sufficiently small. Anonymity, record-keeping and enforcement limitations also permit some incidence of default, in equilibrium.
Liquidity, Financial Intermediation, and Monetary Policy in a New Monetarist Model
, 2010
"... A model of public and private liquidity is constructed to answer some basic questions in monetary economics, and to address some pressing monetary policy issues, in part related to the financial crisis. The model integrates financial intermediation theory with New Monetarist monetary frameworks. A o ..."
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Cited by 3 (1 self)
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A model of public and private liquidity is constructed to answer some basic questions in monetary economics, and to address some pressing monetary policy issues, in part related to the financial crisis. The model integrates financial intermediation theory with New Monetarist monetary frameworks. A one-time open market sale of nominal government bonds by the central bank can have permanent real effects. Liquidity traps can arise, even with an infation rate greater than what the Friedman rule dictates. Costs of operating a currency system matter for optimal monetary policy. Risk shocks can produce financial crisis features. 1 1
Transferability, Finality, and Debt Settlement
, 2002
"... Abstract: The process of payment is fundamental to exchange in a decentralized economy. In production economies, payments often take the form of transfers of inside money, i.e., specialized forms of debt. Associated with each type of inside money is a set of rules that governs both the legitimacy of ..."
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Cited by 1 (1 self)
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Abstract: The process of payment is fundamental to exchange in a decentralized economy. In production economies, payments often take the form of transfers of inside money, i.e., specialized forms of debt. Associated with each type of inside money is a set of rules that governs both the legitimacy of such transfers as means of extinguishing other debts, and the allocation of the ensuing risks. In this paper the authors develop a model of debt as inside money. They focus on an historically important form of payment: “negotiable instruments ” such as the bill of exchange. In a simple mechanism design framework the authors show the advantages of transferable debt over simple chains of credit. The model is then extended to encompass other aspects of negotiability, including “endorsement ” and the rights of a “holder in due course.” JEL classification: E400, G200, K200
Elastic money, inflation, and interest rate policy
, 2007
"... Abstract We study optimal monetary policy in an environment in which money plays a basic role in facilitating exchange, aggregate shocks affect households asymmetrically and exchange may be conducted using either bank deposits (inside money) or fiat currency (outside money). A central bank controls ..."
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Cited by 1 (1 self)
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Abstract We study optimal monetary policy in an environment in which money plays a basic role in facilitating exchange, aggregate shocks affect households asymmetrically and exchange may be conducted using either bank deposits (inside money) or fiat currency (outside money). A central bank controls the stock of outside money in the long-run and responds to shocks in the short-run using an interest rate policy that manages private banks' creation of inside money and influences households' consumption. The zero bound on nominal interest rates prevents the central bank from achieving efficiency in all states. Long-run inflation can improve welfare by mitigating the effect of this bound.
