Payments Systems with Random Matching and Private Information

A model of dynamic risk-sharing is constructed where agents meet pairwise and at random, and there is private information about endowments. Risk sharing is accomplished through dynamic contracts involving credit transactions, and through monetary exchange. A Friedman rule is optimal, and solutions are computed. The welfare costs of in‡ation and the e¤ects of in‡ation on the distribution of consumption and wealth are small for an economy calibrated to U.S. data. However, these e¤ects are large when the credit system is relatively