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E-money: Legal Restrictions Theory and Monetary Policy

Ohik Kwon () and Jaevin Park ()
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Ohik Kwon: Economic Research Institute, The Bank of Korea
Jaevin Park: Department of Economics, The University of Mississippi

No 2018-17, Working Papers from Economic Research Institute, Bank of Korea

Abstract: This paper studies the efficiency of electronic money system by focusing on the decentralized setting of issuance. In the model competitive money issuers can create small denominated money (or e-money) backed by large denominated government bonds. Under the decentralized environment the issuers can also produce counterfeit collateral at a proportional cost. This moral hazard incentive requires the more government bonds for the issuers to provide the same amount of money. In general equilibrium the individual money issuers do not internalize the aggregate effect of money supply. Thus the equilibrium allocation is constrained inefficient with the moral hazard incentives. We suggest a pigouvian tax on money supply to correct the externality in aggregate money supply.

Keywords: Limited Commitment; Moral Hazard; Externality; Open-market Operations (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-pay
Date: 2018-06-19
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http://papers.bok.or.kr/RePEc_attach/wpaper/english/wp-2018-17.pdf Working Paper, 2018 (application/pdf)

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