Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/189422 
Authors: 
Year of Publication: 
2007
Series/Report no.: 
Queen's Economics Department Working Paper No. 1146
Publisher: 
Queen's University, Department of Economics, Kingston (Ontario)
Abstract: 
This paper presents an integrated theory of money and banking. I address the following question: when both individuals and banks have private information, what is the optimal way to settle debts? I develop a dynamic model with micro-founded roles for banks and a medium of exchange. I establish two main results: first, markets can improve upon the optimal dynamic contract at the presence of private information. Market prices fully reveal the aggregate states and help solve the incentive problem of the bank. Secondly, it is optimal for the bank to require loans be settled with short-term inside money, i.e., bank money that expires immediately after the settlement of debts. Short-term inside money makes it less costly to induce truthful revelation and achieve more efficient risk sharing.
Subjects: 
banking
inside money
outside money
JEL: 
E4
G2
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.