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Aggregate uncertainty, money and banking

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  • Sun, Hongfei

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
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  • Sun, Hongfei, 2007. "Aggregate uncertainty, money and banking," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1929-1948, October.
    • Handle: RePEc:eee:moneco:v:54:y:2007:i:7:p:1929-1948
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    References listed on IDEAS

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    1. David Andolfatto & Ed Nosal, 2003. "A theory of money and banking," Working Papers (Old Series) 0310, Federal Reserve Bank of Cleveland.
    2. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "Inside and outside money as alternative media of exchange," Proceedings, Federal Reserve Bank of Cleveland, pages 443-468.
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    10. Winton Andrew, 1995. "Delegated Monitoring and Bank Structure in a Finite Economy," Journal of Financial Intermediation, Elsevier, vol. 4(2), pages 158-187, April.
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    Cited by:

    1. Parag Waknis, 2011. "Monetary Policy under Leviathan Currency Competition," Working papers 2011-21, University of Connecticut, Department of Economics.
    2. Cyril Monnet & Daniel R. Sanches, 2015. "Private Money and Banking Regulation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(6), pages 1031-1062, September.
    3. Dong, Mei & Huangfu, Stella & Sun, Hongfei & Zhou, Chenggang, 2021. "A macroeconomic theory of banking oligopoly," European Economic Review, Elsevier, vol. 138(C).
    4. Sun, Hongfei, 2007. "Banking, Inside Money and Outside Money," MPRA Paper 4504, University Library of Munich, Germany.
    5. Hongfei Sun & Stella Huangfu, 2011. "Private money and bank runs," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 44(3), pages 859-879, August.
    6. Waknis, Parag, 2017. "Competitive Supply of Money in a New Monetarist Model," MPRA Paper 75401, University Library of Munich, Germany.
    7. Allen Head & Junfeng Qiu, 2007. "Elastic Money, Inflation, And Interest Rate Policy," Working Paper 1152, Economics Department, Queen's University.

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    More about this item

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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