Endogenous supply of fiat money

Luis Araujo () and Braz Camargo ()

Journal of Economic Theory, 2008, vol. 142, issue 1, pages 48-72

Abstract: We consider whether reputation concerns can discipline the behavior of a long-lived self-interested agent who has a monopoly over the provision of fiat money. We obtain that when this agent can commit to a choice of money supply, there is a monetary equilibrium where it never overissues. We show, however, that monetary equilibria with no overissue do not exist when there is no commitment. This happens because the incentives this agent has to maintain a reputation for providing valuable currency disappear once its reputation is high enough. More generally, we prove that in the absence of commitment overissue happens infinitely often in any monetary equilibrium. We conclude by showing that imperfect memory can restore the positive result obtained with commitment.

Date: 2008

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Persistent link: http://EconPapers.repec.org/RePEc:eee:jetheo:v:142:y:2008:i:1:p:48-72

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