Imperfect Monitoring and the Discounting of Inside MoneyInternational Economic Review (2008)
AbstractThis paper 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 paper 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.
Publication DateAugust, 2008
Citation InformationDavid C Mills. "Imperfect Monitoring and the Discounting of Inside Money" International Economic Review Vol. 49 Iss. 3 (2008)
Available at: http://works.bepress.com/davidcmills/2/