A model of circulating private debt

Robert M. Townsend and Neil Wallace

No 83, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: We study the possible specialness of circulating as opposed to noncirculating private securities using models whose equilibria imply the existence of both. The models are pure exchange setups with spatial separation and with the potential for a variety of intertemporal trades. We find a sense in which unregulated circulating private securities are troublesome. It can happen that in order for an equilibrium to exist, the amounts of circulating debts issued at the same time in spatially and informationally separated markets have to satisfy restrictions not implied by individual maximization and market clearing in each market separately.

Date: 1982
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