On the Private Provision of Fiat Currency

Berentsen, Aleksander (2005): On the Private Provision of Fiat Currency. Published in: European Economic Review , Vol. 50, No. 7 (7 October 2006): pp. 1683-1698.

Abstract

This paper considers whether fiat money can be provided by a revenue-maximizing monopolist in an environment where money is essential. Two questions arise concerning the private supply of money: Is it feasible and is it optimal? Concerning the feasibility question, I show that the revenue-maximizing policy is time-consistent if the trading history of the issuer is public information and if money demanders respond to the revelation of defection by playing autarky. Concerning the optimality question, the model suggests that any private organization of the market for fiat currency is suboptimal.

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

References

Barro, Robert J. and David B. Gordon (1983). Rules, Discretion and Reputation in a Model of Monetary Policy. Journal of Monetary Economics, 12, 101-121.

Berentsen, Aleksander and Rocheteau, Guillaume (2002). On the Efficiency of Monetary Exchange: How Divisibility of Money Matters. Journal of Monetary Economics, 49:8, November 2002, 1621-49.

Berentsen, Aleksander and Rocheteau, Guillaume (2002). (2003). On the Friedman Rule in Search Models with Divisible Money. Contributions to Macroeconomics: Vol. 3: No. 1, Article 11.

Calvo : Calvo, Guillermo, 1978. Optimal Seignorage from Money Creation: An Analysis in Terms of the Optimum Balance of Payment Deficit Problem. Journal of Monetary Economics 4, 503-517.

Cavalcanti, Ricardo, Andres Erosa, and Ted Temzelides, 1999. Private Money and Reserve Management in a Random-Matching Model. Journal of Political Economy.

Cavalcanti, Ricardo and Neil Wallace, 1999a. A Model of Private Banknote Issue. Review of Economic Dynamics 2, 104 - 136.

------. 1999b. Inside and Outside Money as Alternative Media of Exchange. Journal of Money, Credit and Banking 31 (3), 443 - 457.

Calomiris, Charles W., and Kahn, Charles M. 1996. The efficiency of self-regulated payments systems: Learning from the Suffolk System. Journal of Money, Credit, and Banking 28 (November, Part 2): 766 --97.

Fratianni, M., J. von Hagen and C. Waller, 1997. Central Banking as a Political Principal-Agent Problem, Economic Inquiry 35, 378-393.

Hellwig, Martin F., 1985. What Do We Know About Currency Competition? Zeitschrift für Wirtschafts- und Sozialwissenschaften 105, 565-88.

Kiyotaki, Nobuhiro and Randall Wright, 1991. A Contribution to the Pure Theory of Money. Journal of Economic Theory 53, 215-34.

------. 1993. A Search Theoretic Approach to Monetary Economics. American Economic Review 83, 63-77.

Klein, Benjamin, 1974. The Competitive Supply of Money. Journal of Money, Credit and Banking 6 (4), 423 - 453.

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

Kocherlakota, Narayana and Neil Wallace, 1998. Optimal Allocations with Incomplete Record Keeping and No Commitment. Journal of Economic Theory 81, 272 - 289.

Lagos, R. and R. Wright (2005). A Unified Framework for Monetary Theory and Policy Evaluation. Journal of Political Economy (forthcoming).

Martin, Antoine and Stacey L. Shreft (2003). Currency Competition: A Partial Vindication of Hayek. Working Paper. Federal reserve bank of Kansas City.

Ritter, Joseph, 1995. The Transition from Barter to Fiat Money. American Economic Review 85:1, 134-49.

Rolnick, Arthur J., Bruce D. Smith and Warren E. Weber, 1998. Lessons From a Laissez-Faire Payments System: The Suffolk Banking System (1825--58). Federal Reserve Bank of Minneapolis Quarterly Review Vol. 22, No. 3, Summer 1998, 11--21.

Shi, Shouyong, 1997. A Divisible Search Model of Fiat Money. Econometrica 65, 75-102.

------. 1999. Search, Inflation, and Capital Accumulation. Journal of Monetary Economics 44 No.1, 81-104.

Taub, Bart, 1985. Private Fiat Money with Many Suppliers. Journal of Monetary Economics 16, 195-208.

Von Hayek, Friedrich A., 1976. Denationalisation of Money. Institute of Economic Affairs, London. Hobart Paper Special, 70.

Wallace, Neil, 2001. Whither Monetary Economics International Economic Review, 42, 847-869.

Waller, Christopher J., 1992. The Choice of a Conservative Central Banker in a Multisector Economy. American Economic Review, 82(4), 1006-12.

Walsh, Carl E., 1995. Optimal Contracts for Central Bankers. American Economic Review, 85, 150-167.

White, Lawrence H., 1999. The Theory of Monetary Institutions. Blackwell Publishers, Oxford,

Williamson, 1999. Private Money. Journal of Money, Credit and Banking 31 (3), 469 - 491.