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E-money: Legal Restrictions Theory and Monetary Policy

Author

Listed:
  • Ohik Kwon

    (Economic Research Institute, The Bank of Korea)

  • Jaevin Park

    (Department of Economics, The University of Mississippi)

Abstract

This paper studies the efficiency of electronic money system by focusing on the decentralized setting of issuance. In the model competitive money issuers can create small denominated money (or e-money) backed by large denominated government bonds. Under the decentralized environment the issuers can also produce counterfeit collateral at a proportional cost. This moral hazard incentive requires the more government bonds for the issuers to provide the same amount of money. In general equilibrium the individual money issuers do not internalize the aggregate effect of money supply. Thus the equilibrium allocation is constrained inefficient with the moral hazard incentives. We suggest a pigouvian tax on money supply to correct the externality in aggregate money supply.

Suggested Citation

  • Ohik Kwon & Jaevin Park, 2018. "E-money: Legal Restrictions Theory and Monetary Policy," Working Papers 2018-17, Economic Research Institute, Bank of Korea.
    • Handle: RePEc:bok:wpaper:1817
    as

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    File URL: http://papers.bok.or.kr/RePEc_attach/wpaper/english/wp-2018-17.pdf
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    References listed on IDEAS

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    Cited by:

    1. Donato Masciandaro, 2018. "Central Bank Digital Cash and Cryptocurrencies: Insights from a New Baumol–Friedman Demand for Money," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 51(4), pages 540-550, December.
    2. Emanuele Borgonovo & Stefano Caselli & Alessandra Cillo & Donato Masciandaro & Giovanno Rabitti, 2018. "Cryptocurrencies, central bank digital cash, traditional money: does privacy matter?," BAFFI CAREFIN Working Papers 1895, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

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    More about this item

    Keywords

    Limited Commitment; Moral Hazard; Externality; Open-market Operations;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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