This paper examines a simple monetary optimizing model with sticky-prices. Two types of monetary policy rules are considered: constant money growth rules and interest-rate feedback (Taylor-type) rules. In the case of constant money growth rules, we show the existence of limit cycles through the Hopf bifurcation theorem. On the other hand, in the case of the interest-rate feedback rules, we show...

The paper compares the credibility of currency boards and (standard) pegs. Abandoning a currency board requires a time-consuming legislative process and an abolition will thus be previously expected. Therefore, a currency board solves the time inconsistency problem of monetary policy. However, policy can react to unexpected shocks only with a time lag, thus the threat of large shocks makes the ...

Given the renewed interest in alternative monetary systems, it is conceivable that some may reconsider Hayek’s proposal for competing monies. I attempt to show that Hayek underestimates the importance of network effects. As a result, his confidence in believing the mere admission of competing private currencies will spontaneously generate a more stable monetary system is unfounded. After review...

In this paper we show that if the government can levy taxes to back the currency, speculative hyperinflations are ruled out as equilibrium outcomes. This is so even though convertibility is never observed in equilibrium. The only observational difference between a pure fiat money economy and a convertible economy as the one described in this paper is the potential of the former to exhibit specu...

Under the National Banking System, 1863–1914, national banks that deposited sufficient collateral could issue notes provided they paid a tax on notes in circulation: 1% per year before 1900 and 12% thereafter. Because note issue was far below the allowed maximum, an arbitrage argument predicts that short-term nominal interest rates should have been bounded above by the tax rate. They were not. ...

We develop a theory of money and credit as competing payment instruments, then put it to work in applications. Buyers can use cash or credit, with the former (latter) subject to the inflation tax (transaction costs). Frictions making the choice of payment method interesting also imply equilibrium price dispersion, and together these deliver closed-form solutions for money demand. The model can ...

The current discussion about the future of the financial system draws heavily on a set of theories known as the ‘New Monetary Economics’. The New Monetary Economics predicts that deregulation and financial innovation will lead to a moneyless world. This paper uses a market microstructure approach to show that a common medium of exchange that serves as unit of account will remain a necessary ins...

Commodity money arises endogenously in a general equilibrium model with separate budget constraints for each transaction. Transaction costs imply differing bid and ask (selling and buying) prices. The most liquid good—with the smallest proportionate bid/ask spread—becomes commodity money. General equilibrium may not be Pareto efficient. If zero-transaction-cost money is available then the equil...

This paper argues that inflation-targeting central banks should announce explicit loss function with numerical relative weights on output-gap stabilization and use and announce optimal time-varying instrument-rate paths and corresponding inflation and output-gap forecasts. Simple voting procedures for forming the Monetary Policy Committee’s aggregate loss function and time-varying instrument-ra...

In spite of their importance in real economics, multiple equilibria in closed exchange and production-and-exchange economies are usually ignored in macroeconomic models. We argue that default and bankruptcy laws create conditions for a unique equilibrium. We report experimental evidence on the effectiveness of assigning default penalties on fiat money to resolve this multiplicity and select a s...