Aggregate Uncertainty, Money and Banking

Hongfei Sun ()

No 58, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies the problem of monitoring the monitor in a model of money and banking with aggregate uncertainty. It shows that when inside money is required as a means of bank loan repayment, a market of inside money is entailed at the repayment stage and generates information-revealing prices that perfectly discipline the bank. The incentive problem of a bank is costlessly overcome simply by involving inside money in repayment. Inside money distinguishes itself from outside money by its inherent ability to provide incentives even on the existence of multiple banks. Thus, in addition to providing liquidity to the economy, inside money contributes to banking by eliminating the cost of monitoring the bank and improving the efficiency of intermediation. Moreover, this model establishes that markets can be a favorable instrument for incentives of truthful revelation

Keywords: Money; Banking; Aggregate Uncertainty (search for similar items in EconPapers)
JEL-codes: D82 E00 G21 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (2)

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Journal Article: Aggregate uncertainty, money and banking (2007)
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