IDEAS home Printed from https://ideas.repec.org/p/pri/econom/2018-8.html
   My bibliography  Save this paper

Inside Money and Liquidity

Author

Listed:
  • Nobuhiro Kiyotaki

    (Princeton University)

  • John Moore

    (University of Edinburgh)

Abstract

Inside money can be depend very broadly as any privately-issued long-term paper that is held by a number of agents in succession. Whenever paper circulates as a means of short-term saving (liquidity), it can properly be considered as money, or a medium of exchange, because agents hold it not for its maturity value but for its exchange value. In this article, we construct a model of an economy in which agents borrow by issuing long-term paper, and use the model to ask: When and why is circulation of the paper essential to the smooth running of the economy? If there is a shortage of liquidity, what are the symptoms? How does the economy respond?

Suggested Citation

  • Nobuhiro Kiyotaki & John Moore, 2018. "Inside Money and Liquidity," Working Papers 2018-8, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2018-8
    as

    Download full text from publisher

    File URL: http://www.princeton.edu/~kiyotaki/papers/km4-5.6.2018(1).pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ricardo de O. Cavalcanti & Andres Erosa & Ted Temzelides, 1999. "Private Money and Reserve Management in a Random-Matching Model," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 929-945, October.
    2. Nobuhiro Kiyotaki & John Moore, 2002. "Evil Is the Root of All Money," American Economic Review, American Economic Association, vol. 92(2), pages 62-66, May.
    3. Freeman, Scott, 1996. "The Payments System, Liquidity, and Rediscounting," American Economic Review, American Economic Association, vol. 86(5), pages 1126-1138, December.
    4. Azariadis, Costas & Bullard, James & Smith, Bruce D., 2001. "Private and Public Circulating Liabilities," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 59-116, July.
    5. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 287-327, April.
    6. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "A model of private bank-note issue," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 104-136, January.
    7. Edward J. Green, 1999. "Money and debt in the structure of payments," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 23(Spr), pages 13-29.
    8. Freeman, Scott, 1996. "Clearinghouse banks and banknote over-issue," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 101-115, August.
    9. 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.
    10. Douglas W. Diamond & Raghuram G. Rajan, 2002. "Bank Bailouts and Aggregate Liquidity," American Economic Review, American Economic Association, vol. 92(2), pages 38-41, May.
    11. Robert M. Townsend & Neil Wallace, 1982. "A model of circulating private debt," Staff Report 83, Federal Reserve Bank of Minneapolis.
    12. Nobuhiro Kiyotaki & John Moore, 2001. "Liquidity, Business Cycles and Monetary Policy (Clarendon Lectures 2)," Edinburgh School of Economics Discussion Paper Series 111, Edinburgh School of Economics, University of Edinburgh.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Goodhart, Charles A.E. & Tsomocos, Dimitrios P. & Wang, Xuan, 2023. "Bank credit, inflation, and default risks over an infinite horizon," Journal of Financial Stability, Elsevier, vol. 67(C).
    2. Pedro J. Gutiérrez-Diez & Tibor Pál, 2023. "Monetary policy models: lessons from the Eurozone crisis," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-19, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Daniel Sanches, 2016. "On the Inherent Instability of Private Money," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 198-214, April.
    2. Ed Nosal & Guillaume Rocheteau, 2006. "The economics of payments," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Feb.
    3. 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.
    4. repec:esx:essedp:755 is not listed on IDEAS
    5. Wang, Tianxi, 2014. "Lend out IOU: A Model of Money Creation by Banks and Central Banking," Economics Discussion Papers 12227, University of Essex, Department of Economics.
    6. Williamson, Stephen & Wright, Randall, 2010. "New Monetarist Economics: Models," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 2, pages 25-96, Elsevier.
    7. James J. McAndrews & William Roberds, 1999. "Payment intermediation and the origins of banking," Staff Reports 85, Federal Reserve Bank of New York.
    8. Stephen Williamson, 2000. "The Research Agenda: Payment Systems and Private Money," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 2(1), November.
    9. Dwyer Jr., Gerald P. & Samartín, Margarita, 2009. "Why do banks promise to pay par on demand?," Journal of Financial Stability, Elsevier, vol. 5(2), pages 147-169, June.
    10. Cyril Monnet & Daniel R. Sanches, 2012. "Private liquidity and banking regulation," Working Papers 12-11, Federal Reserve Bank of Philadelphia.
    11. Nobuhiro Kiyotaki & John Moore, 2002. "Evil Is the Root of All Money," American Economic Review, American Economic Association, vol. 92(2), pages 62-66, May.
    12. Daniel Sanches, 2016. "On The Welfare Properties Of Fractional Reserve Banking," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57, pages 935-954, August.
    13. Holthausen, Cornelia & Monnet, Cyril, 2003. "Money and payments: a modern perspective," Working Paper Series 245, European Central Bank.
    14. Ricardo Lagos, 2006. "Inside and outside money," Staff Report 374, Federal Reserve Bank of Minneapolis.
    15. Daniel R. Sanches, 2013. "Banking crises and the role of bank coalitions," Working Papers 13-28, Federal Reserve Bank of Philadelphia.
    16. Ricardo de O. Cavalcanti, 2010. "Inside-money theory after Diamond and Dybvig," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 96(1Q), pages 59-82.
    17. Li, Yan, 2009. "The theory of fiat money and private money as alternative media of exchange," International Review of Economics & Finance, Elsevier, vol. 18(4), pages 568-582, October.
    18. Daniel R. Sanches, 2013. "On the welfare properties of fractional reserve banking," Working Papers 13-32, Federal Reserve Bank of Philadelphia.
    19. Chao Gu & Fabrizio Mattesini & Randall Wright, 2013. "Banking: A New Monetarist Approach," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(2), pages 636-662.
    20. Martin, Antoine & Schreft, Stacey L., 2006. "Currency competition: A partial vindication of Hayek," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 2085-2111, November.
    21. Hiroshi Fujiki & Edward J. Green & Akira Yamazaki, 1999. "Sharing the risk of settlement failure," Working Papers 594, Federal Reserve Bank of Minneapolis.

    More about this item

    Keywords

    Inside money; Liquidity;

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pri:econom:2018-8. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bobray Bordelon (email available below). General contact details of provider: https://edirc.repec.org/data/deprius.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.