Why Inside Money Matters

Carolyn Sissoko

Journal of Money, Credit and Banking, 2007, vol. 39, issue 8, pages 2097-2105

Abstract: This note observes that in a simple infinite horizon economy with heterogeneous endowments and a cash-in-advance constraint fiat money can be used to implement a Pareto optimum only with type-specific taxation. By contrast, if credit contracts are enforceable, the same allocation can be reached in equilibrium without type specific policy. We argue that the advantages of inside money and the fact that they depend on the capacity of the economy to enforce the repayment of debt direct us toward the study of the institutional infrastructure underlying self-enforcing inside money equilibria. Copyright 2007 The Ohio State University.

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