Money and Credit With Limited Commitment and Theft

Williamson, Stephen and Sanches, Daniel (2009): Money and Credit With Limited Commitment and Theft.

Abstract

We study the interplay among imperfect memory, limited commitment, and theft, in an environment that can support monetary exchange and credit. Imperfect memory makes money useful, but it also permits theft to go undetected, and therefore provides lucrative opportunities for thieves. Limited commitment constrains credit arrangements, and the constraints tend to tighten with imperfect memory, as this mitigates punishment for bad behavior in the credit market. Theft matters for optimal monetary policy, but at the optimum theft will not be observed in the model. The Friedman rule is in general not optimal with theft, and the optimal money growth rate tends to rise as the cost of theft falls.

• Item Type: MPRA Paper
• Language: English
• Keywords: Money; Credit; Limited Commitment; Monetary Policy
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates

References

Aiyagari, S.R. and Williamson, S. 1999. "Credit in a Random Matching Model with Private Information," Review of Economic Dynamics 2, 36-64.

Aiyagari, S.R. and Williamson, S. 2000. "Money and Dynamic Credit Arrangements with Private Information," Journal of Economic Theory 91, 248-279.

Atkeson, A. and Lucas, R. 1992. "On Efficient Distribution with Private Information," Review of Economic Studies 59, 427-453.

Andolfatto, D. 2007. "Incentives and the Limits to Deflationary Policy," manuscript, Simon Fraser University.

Antinolfi, G., Azariadis, C., and Bullard, J. 2007. "The Optimal Inflation Target in an Economy with Limited Enforcement," working paper, Washington University in St. Louis and St. Louis Federal Reserve Bank.

Deviatov, A. and Wallace, N. 2008. "Optimal Central Bank Intervention: An Example," working paper, New Economic School, Moscow, and Pennsylvania State University.

Green, E. 1987. "Lending and the Smoothing of Uninsurable Income," in E. Prescott and N. Wallace, eds., Contractual Arrangements for Intertemporal Trade, pp. 3-25, University of Minnesota Press, Minneapolis, MN.

He, P., Huang, L., and Wright, R. 2006. "Money, Banking, and Monetary Policy," working paper, University of Pennsylvania.

Ireland, P. 1994. "Money and Growth: An Alternative Approach," American Economic Review 84, 47-65.

Kocherlakota, N. 1996. "Implications of Efficient Risk-Sharing Without Commitment," Review of Economic Studies 63, 595-610.

Kocherlakota, N. 1998. "Money is Memory," Journal of Economic Theory 81, 232-251.

Lagos, R. and Wright, R. 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy 113, 463-484.

Rocheteau, G. and Wright, R. 2005. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," Econometrica 73, 175-202.

Townsend, R. 1980. "Models of Money with Spatially Separated Agents," in Models of Monetary Economies, Kareken, J. and Wallace, N., eds., pp. 265-304, Federal Reserve Bank of Minneapolis, Minneapolis, MN.

Trejos, A. and Wright, R. 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy 103, 118-141.