Monetary policy with asset-backed money

We study the use of intermediated assets as media of exchange in a neoclassical growth model. An intermediary is delegated control over productive capital and finances itself by issuing claims against the revenue generated by its operations. Unlike physical capital, intermediated claims are assumed to be liquid—they constitute a form of asset-backed money. The intermediary is assumed to control (i) the number of claims outstanding, (ii) the dividends paid out to claim holders, and (iii) the fee charged for collecting the dividend. We find that for patient economies, the first-best allocation can always be implemented as a competitive equilibrium through an appropriately designed intermediary policy rule. The optimal policy requires inflation – which is equivalent to a policy of persistent (and predictable) dilution of the outstanding stock of asset-backed money. While it is also possible to implement the first-best by introducing fiat money and a lump-sum tax instrument, our results demonstrate that neither of these interventions are necessary for e¢ciency.