On the Inherent Instability of Private Money

42 Pages Posted: 11 Apr 2015

See all articles by Daniel R. Sanches

Daniel R. Sanches

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

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Date Written: April 2015

Abstract

A primary concern in monetary economics is whether a purely private monetary regime is consistent with macroeconomic stability. I show that a competitive regime is inherently unstable due to the properties of endogenously determined limits on private money creation. Precisely, there is a continuum of equilibria characterized by a self-fulfilling collapse of the value of private money and a persistent decline in the demand for money. I associate these equilibrium allocations with self-fulfilling banking crises. It is possible to formulate a fiscal intervention that results in the global determinacy of equilibrium, with the property that the value of private money remains stable. Thus, the goal of monetary stability necessarily requires some form of government intervention.

Keywords: Private Money, Self-Fulfilling Crises, Macroeconomic Stability

JEL Classification: E42, E44, G21

Suggested Citation

Sanches, Daniel R., On the Inherent Instability of Private Money (April 2015). FRB of Philadelphia Working Paper No. 15-18, Available at SSRN: https://ssrn.com/abstract=2592603 or http://dx.doi.org/10.2139/ssrn.2592603

Daniel R. Sanches (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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