IMPERFECT MONITORING AND THE DISCOUNTING OF INSIDE MONEY

David Mills ()

International Economic Review, 2008, vol. 49, issue 3, 737-754

Abstract: This article evaluates the efficiency of a requirement that private issuers redeem inside money on demand at par in a random-matching model of money where the issuers of inside money are imperfectly monitored. I find that for sufficiently imperfect monitoring, a par redemption requirement leads to lower social welfare than if private money were redeemed at a discount. A central message of the article is that if inside money and outside money are not perfect substitutes, a par redemption requirement may not be socially optimal because such a requirement effectively binds them to circulate as if they are. Copyright © 2008 the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 2008
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Working Paper: Imperfect monitoring and the discounting of inside money (2007)
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