Working Paper No. 12-19/r on the Inherent Instability of Private Money
نویسندگان
چکیده
We show that a purely private monetary system is inherently unstable due to the role of endogenous debt limits in the creation of private money. Because peoples ability to issue notes (personal liabilities that circulate as a medium of exchange) depends on beliefs about the exchange value of their notes in future periods, there exist multiple equilibria. Some of these equilibria have undesirable properties: Self-ful lling panics are possible outcomes. In response to this inherent instability of private money, we formulate a government intervention that ensures the determinacy of equilibrium. In particular, we de ne an operational procedure for a monetary authority capable of ensuring the stability and e¢ ciency of the monetary system. Keywords: Private money; endogenous debt limits; central banking JEL classi cation: E42, E51, E58
منابع مشابه
Working Paper No. 12-11/r Private Money and Banking Regulation
We establish a fundamental relationship between the return on the banking sectors assets and each bankers willingness to supply liabilities that facilitate payments and settlement (private money). In particular, we show that the regulation of lending practices is necessary for the optimal provision of private money. In an environment in which bankers cannot commit to their promises, an unregu...
متن کاملWorking Paper No. 15-19 Private Money and Banking Regulation
We show that a competitive banking system is inconsistent with an optimum quantity of private money. Because bankers cannot commit to their promises and the composition of their assets is not publicly observable, a positive franchise value is required to induce the full convertibility of bank liabilities. Under perfect competition, a positive franchise value can be obtained only if the return o...
متن کاملWorking Paper No. 11-43 Sovereign Risk and the Effects of Fiscal Retrenchment in Deep Recessions
We analyze the effects of government spending cuts on economic activity in an environment of severe fiscal strain, as reflected by a sizeable risk premium on government debt. Specifically, we consider a “sovereign risk channel,” through which sovereign default risk spills over to the rest of the economy, raising funding costs in the private sector. Our analysis is based on a variant of the mode...
متن کاملDynamic Relationship Between Macroeconomic Instability and Private Investment in the Iranian Economy
This paper investigates the relationship between macroeconomic instability and private investment of the Iranian economy. The study uses a trivariate VAR(2)-GARCH(1,1)-in-Mean with diagonal BEKK approach to proxied inflation and exchange rate uncertainties as the main indicators of macroeconomic instability. Moreover, Bounds testing approach to level relationship applied to investigate the long...
متن کاملمدل سازی الگوی رفتار بین نسلی از عملکرد بانکداری ذخیره ی جزئی
The purpose of this paper is to investigate the source of fractional reserve banking and to review the literature on bank credit. Evaluating the operational procedure of this banking model demonstrates a new concept of credit money shaping aspect and its affect on the practical economy. The difference in due dates between depositing and receiving loan that causes Ex-nihio money to exist, the ef...
متن کامل