Private Money

A random matching environment is constructed where banks mitigate a mismatch between the timing of investment payo¤s and when agents wish to consume. Claims on banks may serve as media of exchange, i.e. private money. Two problems can emerge with private money. First, there may exist welfaredominated equilibria where banks hold low-return assets. Second, private media of exchange may be subject to lemons problems. In spite of these problems, the introduction of ...at money can decrease welfare, as this displaces private money and results in a crowding out of productive intermediation. ¤This paper was prepared for the 1998 JMCB/Cleveland Federal Reserve Conference on the Role of Central Banks in Money and Payments Systems. I would like to thank seminar participants at the Penn State search conference, 1998, the Cleveland Federal Reserve Bank, the University of Iowa, and the Minneapolis Federal Reserve Bank for helpful comments and suggestions.