On the inherent instability of private money

Daniel Sanches

No 15-18, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: A primary concern in monetary economics is whether a purely private monetary regime is consistent with macroeconomic stability. I show that a competitive regime is inherently unstable due to the properties of endogenously determined limits on private money creation. Precisely, there is a continuum of equilibria characterized by a self-fulfilling collapse of the value of private money and a persistent decline in the demand for money. I associate these equilibrium allocations with self-fulfilling banking crises. It is possible to formulate a fiscal intervention that results in the global determinacy of equilibrium, with the property that the value of private money remains stable. Thus, the goal of monetary stability necessarily requires some form of government intervention.

Keywords: Private money; Self-fulfilling crises; Macroeconomic stability (search for similar items in EconPapers)
JEL-codes: E42 E44 G21 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2015-04-09
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: On the Inherent Instability of Private Money (2016)
Working Paper: On the inherent instability of private money (2012)
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