The Nature of Money in a Convertible Currency World

In a world where the means of exchange is convertible into numeraire consumption good at fixed rate, no one wants to hold money over time – and due convertibility there by which Friedman rule can generate deflation. This environment we study in this paper order demonstrate that still way reach first-best: institutionalize naked shorting unit account, or other words establish banking system.
 To motivate benefits system, has real productivity shocks are constantly changing optimal level economic activity, so quantity inherently stochastic. Efficiency such an requires capacity expand supply on “as needed” basis. We show how debt-based payments system relies banks certify individual debtors’ IOUs addresses monetary problem.
 model explains (i) central bank policy as stabilizing (ii) usury laws promoting equilibria favor non-banks those banks. Furthermore, modeling commercial bank-based efficient solution problem develops theoretic framework may be used evaluate digital currency proposals.