Private money

About: Private money is a research topic. Over the lifetime, 270 publications have been published within this topic receiving 3909 citations.

Ignorance, Debt and Financial Crises +

Abstract: In this paper we provide a theory of money markets and private money. We show that preserving symmetric ignorance in liquidity provision is welfare maximizing and strictly dominates symmetric or even perfect information. A key property for the functioning of money markets is when agents have no need to ask questions and no incentive to produce private information about the value of the security. Debt is the optimal private money because it is least information acquisition sensitive. Bad public news (shock) about the fundamentals of assets that back debt can cause information-insensitive debt to become information-acquisition sensitive. The expected value of debt drops, but to prevent endogenous adverse selection agents reduce the amount of trade below the expected value of debt. The shock is amplified, leading to a financial crisis.

Banks as Secret Keepers

Abstract: Banks produce short-term debt for transactions and storing value. The value of bank money must not vary over time so agents can easily trade this debt at par. This requires that no agent finds it profitable to produce costly private information about the bank's loans. To produce safe liquidity banks choose loans with high such costs. Capital markets cannot produce substitutes for bank money because they involve information revelation. They produce risky liquidity. This trade-off determines firms' choices between banks and capital markets for financing, and the aggregate amount of safe liquidity.

Inside and outside Money as Alternative Media of Exchange

Abstract: We study a random matching model of money in which a subset of people, called bankers, have known histories and the rest, called nonbankers, have unknown histories. Earlier, we showed that if there are no outside assets, then an optimal arrangement has bankers issuing objects, banknotes, that are used in trades involving nonbankers. Here, the same model is used to compare such exclusive use of inside money to the exclusive use of outside money. We show that the set of implementable outcomes using outside money is a strict subset of the set using inside money.

A Comparative‐Advantage Approach to Government Debt Maturity

Abstract: We study optimal government debt maturity in a model where investors derive monetary services from holding riskless short-term securities. In a simple setting where the government is the only issuer of such riskless paper, it trades off the monetary premium associated with short-term debt against the refinancing risk implied by the need to roll over its debt more often. We then extend the model to allow private financial intermediaries to compete with the government in the provision of money-like claims. We argue that if there are negative externalities associated with private money creation, the government should tilt its issuance more towards short maturities. The idea is that the government may have a comparative advantage relative to the private sector in bearing refinancing risk, and hence should aim to partially crowd out the private sector’s use of short-term debt.

Does Private Money Buy Public Policy? Campaign Contributions and Regulatory Outcomes in Telecommunications

Abstract: To what extent can market particip ants affect the outcomes of regulatory policy? In this paper, we study the effects of one potential source of influence – campaign contributions – from competing interests in the local telecommunications industry, on regulatory policy decisions of state pu blic utility commissions. Using a unique new data set, we find, in contrast to much of the literature on campaign contributions, that there is a significant effect of private money on regulatory outcomes. Indeed, this result is robust to numerous alternat ive specifications and persists with instrumentation. We also assess the extent of omitted variable bias that would have to exist to obviate the estimated result. We find that for our result to be spurious, omitted variables would have to explain more th an five times the variation in the mix of private money as is explained by the variables included in our analysis. We consider this to be very unlikely.