This paper develops a model of the circumstances under which it is beneficial to participate in a currency area. The proposed two-country monetary model of trade with nominal rigidities encompasses the real and monetary arguments suggested by the optimum currency area literature: correlation of real and monetary shocks, international factor mobility, fiscal adjustment, openness, difference in n...

Networks constructed from credit relationships in the interbank market have been found to exhibit disassortative mixing together with a scale-free degree distribution, in contrast to most social networks that are assortative and not necessarily scale-free. This provokes the question whether generating mechanisms for scale-free networks have enough flexibility to generate both assortative and di...

This paper develops a change-point VAR model that isolates four major macroeconomic regimes in the US since the 1960s. The model identifies shocks to demand, supply, monetary policy, and spread yield using restrictions from a general equilibrium model. The analysis discloses important changes to the statistical properties of key macroeconomic variables and their responses to the identified shoc...

We examine the question of whether transactable forms of privately issued, demandable debt are better used as “banknotes” or “checks.” The distinction between the two is that a check must be redeemed by the issuing bank with each use, whereas a banknote can circulate. We find that the answer to the question depends critically on the cost of early redemption. If this cost is small, banknotes wil...

We show that a purely private monetary system is inherently unstable due to the role of endogenous debt limits in the creation of private money. Because people’s ability to issue notes (personal liabilities that circulate as a medium of exchange) depends on beliefs about the exchange value of their notes in future periods, there exist multiple equilibria. Some of these equilibria have undesirab...

The accession of several Central and Eastern European Countries to Euroland is likely to be realised within the next years. Some studies aim at analysing the suitability of these Euro aspirants for currency union with EMU by evaluating the related macroeconomic costs. Still, they are prone to the Lucas critique since they do not consider endogeneity of the relevant criteria. We build on methodo...

This paper considers the role of monetary policy in mitigating the effects of financial crises. I suppose that the economy occasionally but infrequently experiences crises, where financial variables directly affect the broader real economy. I analyze the formulation of monetary policy under such financial uncertainty, where policymakers recognize the possibility of financial crises, which leads...

This paper studies a dynamic network economy where risk averse traders trade multi-laterally over the counter but cannot commit to fulfill their short positions. We show that, although the level of trade is below the first-best, bilateral clearing with collateral can provide an allocation superior to those without collateral. However, with use of collateral, the optimal bilateral clearing contr...

We establish a fundamental relationship between the return on the banking sector’s assets and each banker’s willingness to supply liabilities that facilitate payments and settlement (private money). In particular, we show that the regulation of lending practices is necessary for the optimal provision of private money. In an environment in which bankers cannot commit to their promises, an unregu...

Article history: Received 8 September 2007 Received in revised form 9 April 2008 Accepted 17 July 2008 Available online 7 August 2008 A random-matching model with a clearinghouse is constructed to investigate the impact of privatemoney on economic efficiency and social welfare in threemonetary regimes. A subset of agents, called bankers, whose credit histories are recorded by the clearinghouse,...