Nominal Contracts and the Payment System

Hajime Tomura

No 1923, Working Papers from Waseda University, Faculty of Political Science and Economics

Abstract: This paper introduces into an overlapping generations model the courts inability to distinguish different qualities of goods of the same kind. Given the recognizability of fiat money for the court, this friction leads to the use of nominal debt contracts as well as the use of fiat money as a means of payment in the goods market. This result holds without dynamic inefficiency or lack of double coincidence of wants. Instead, money is necessary because it is essential for credit. However, there can occur a shortage of real money balances for liability settlements, even if the money supply follows a Friedman rule. This problem can be resolved if the central bank can lend fiat money to agents elastically at a zero intraday interest rate within each period. Given the economy being dynamically efficient, this policy makes the money supply cease to be the nominal anchor for the price level. In this case, the monetary steady state becomes compatible with other nominal anchors than the money supply.

Keywords: Nominal contract; Discount window; Trade credit; Cashless economy; Payment system; Legal tender (search for similar items in EconPapers)
JEL-codes: E42 E51 E58 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2020-03
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Nominal contracts and the payment system (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:wap:wpaper:1923

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