Circulation of Private Notes During a Currency Shortage
UPF Economics and Business Working Paper No. 811
42 Pages Posted: 17 Nov 2005
Date Written: March 2005
Abstract
This paper provides a search theoretical model that captures two phenomena that have characterized several episodes of monetary history: currency shortages and the circulation of privately issued notes. As usual in these models, the media of exchange are determined as part of the equilibrium. We characterize all the different equilibria and specify the conditions under which there is a currency shortage and/or privately issued notes are used as means of payment. There is multiplicity of equilibria for the entire parameter space, but there always exist an equilibrium in which notes circulate, either alone or together with coins. Hence, credit is a self-fulfilling phenomenon that depends on the beliefs of agents about the acceptability and future repayment of notes. The degree of circulation of coins depends on two crucial parameters, the intrinsic utility of holding coins and the extent with which it is possible to find exchange opportunities in the market.
Keywords: Money, notes, search, credit, currency shortage
JEL Classification: E40, D83
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
A Unified Framework for Monetary Theory and Policy Analysis
By Ricardo Lagos and Randall Wright
-
A Unified Framework for Monetary Theory and Policy Analysis, Second Version
By Ricardo Lagos and Randall Wright
-
Liquidity, Business Cycles, and Monetary Policy
By Nobuhiro Kiyotaki and John Moore
-
Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium
-
By Gabriele Camera and Dean Corbae
-
Individual and Aggregate Real Balances in a Random Matching Model
By Ruilin Zhou
-
Search, Money and Capital: a Neoclassical Dichotomy
By S. Borağan Aruoba and Randall Wright
-
Search, Money and Capital: A Neoclassical Dichotomy, Second Version
By S. Borağan Aruoba and Randall Wright
-
On the Efficiency of Monetary Exchange: How Divisibility of Money Matters