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IMPERFECT MONITORING AND THE DISCOUNTING OF INSIDE MONEY *
Author(s) -
Mills, Jr David C.
Publication year - 2008
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2008.00496.x
Subject(s) - issuer , imperfect , economics , discounting , monetary economics , microeconomics , demand deposit , matching (statistics) , velocity of money , fiat money , money measurement concept , endogenous money , finance , monetary policy , mathematics , linguistics , philosophy , statistics
This article evaluates the efficiency of a requirement that private issuers redeem inside money on demand at par in a random‐matching model of money where the issuers of inside money are imperfectly monitored. I find that for sufficiently imperfect monitoring, a par redemption requirement leads to lower social welfare than if private money were redeemed at a discount. A central message of the article is that if inside money and outside money are not perfect substitutes, a par redemption requirement may not be socially optimal because such a requirement effectively binds them to circulate as if they are.