MONEY, MARKETS, AND DYNAMIC CREDIT
Published online by Cambridge University Press: 26 October 2010
This paper presents an integrated theory of money and dynamic credit. I study financial intermediation when both the intermediary and individuals have private information. I show that money is essential to solving two-sided incentive problems under the dynamic credit arrangement. First, requiring settlement with money can induce market trades that generate information-revealing prices to discipline the intermediary. Second, it is optimal for the intermediary to issue money that can record its own history of being used in settlements, and to require that settlements be made with only money that has been returned to the intermediary every settlement period. This arrangement effectively reduces individuals' incentives to deviate and allows intermediation to achieve efficient allocations.
- Macroeconomic Dynamics , Volume 15 , Supplement S1: Money, Credit, and Liquidity: Part 1 , April 2011 , pp. 42 - 61
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