One or Two Monies?

Janet Hua, Jiang and Mei, Dong (2008): One or Two Monies?

Abstract

We investigate whether money constitutes a perfect substitute for the missing record-keeping technology in a quasi-linear environment, where private information and limited commitment are present. We adopt the mechanism design approach and solve a social planner�s problem subject to the resource constraint, the incentive constraints imposed by the existing frictions, and the available memory technologies. The result is that when money is divisible, concealable and in variable supply, a single money may or may not be su¢ cient to replace the record-keeping technology. We further show that two monies serve as a perfect substitute for the record-keeping technology so that there is no need for a third money.

• Item Type: MPRA Paper
• Language: English
• Keywords: Record-keeping, Money, Private Information, Limited Commit- ment, Mechanism Design
• Subjects: F - International Economics > F3 - International Finance > F30 - General; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E40 - General

References

Andolfatto, David (2008), "The Simple Analytics of Money and Credit in a Quasi-linear Environment," Manuscript, Simon Fraser University.

Camera, Gabriele, Ben Craig and Christopher J. Waller, (2004), "Currency Competition in a Fundamental Model of Money," Journal of International Economics, 64, 521-544.

Camera, Gabriele and Johannes Winkler, (2003), "International Monetary Trade and the Law of One Price," Journal of Monetary Economics, 50, 1531-1553.

Craig, Ben and Christopher J. Waller, (2004), "Dollarization and Currency Exchange," Journal of Monetary Economics, 51, 671-689.

Kocherlakota, Narayana (1998a), "The Technological Role of FiatMoney," Federal Reserve Bank of Minneapolis Quarterly Review, 22 (3), 2-10.

Kocherlakota, Narayana (1998b), "Money is Memory," Journal of Economic Theory, 81(2), 232-251.

Kocherlakota, Narayana and Thomas Krueger (1999), "A Signaling Model of Multiple Currencies", Review of Economic Dynamics, 2, 231-244.

Kocherlakota, Narayana (2002). "The Two-money Theorem," International Economic Review, 43(2), 333-346.

Lagos, Ricardo and Randall Wright (2005), "A Uni�ed Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, 113(3), 463-484.

Townsend, Robert M. (1987), "Economic Organization with Limited Communication", The American Economic Review, 77(5), 954-971.

Trejos, Alberto and Randall Wright (1995), "Search, Money, Bargaining, and Prices," Journal of Political Economy, 103, 118-141.

Trejos, Alberto and Randall Wright (2001), "International Currency," Advances in Macroeconomics, Vol 1, Issue 1, Article 3.

Waller, Christopher (2007), "Dynamic Taxation, Private Information andMoney," Manuscript, University of Notre Dame.