Circulation of private notes during a currency shortage

Xavier Cuadras-Morató

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: This paper provides a search theoretical model that captures two phenomena that have characterized several episodes of monetary history: currency shortages and the circulation of privately issued notes. As usual in these models, the media of exchange are determined as part of the equilibrium. We characterize all the different equilibria and specify the conditions under which there is a currency shortage and/or privately issued notes are used as means of payment. There is multiplicity of equilibria for the entire parameter space, but there always exist an equilibrium in which notes circulate, either alone or together with coins. Hence, credit is a self-fulfilling phenomenon that depends on the beliefs of agents about the acceptability and future repayment of notes. The degree of circulation of coins depends on two crucial parameters, the intrinsic utility of holding coins and the extent with which it is possible to find exchange opportunities in the market.

Keywords: money; notes; search; credit; currency shortage (search for similar items in EconPapers)
JEL-codes: D83 E40 (search for similar items in EconPapers)
Date: 2005-03
New Economics Papers: this item is included in nep-mac and nep-mon
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Related works:
Working Paper: Circulation of Private Notes during a Currency Shortage (2015)
Journal Article: CIRCULATION OF PRIVATE NOTES DURING A CURRENCY SHORTAGE* (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:811

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