Outside and Inside Money: A Mechanism Design Approach
Open Access
- Author:
- Mills, David Charles
- Graduate Program:
- Economics
- Degree:
- Doctor of Philosophy
- Document Type:
- Dissertation
- Date of Defense:
- July 23, 2001
- Committee Members:
- B Ravikumar, Committee Member
Neil Wallace, Committee Chair/Co-Chair
Tomas Sjostrom, Committee Member - Keywords:
- payments systems
random matching
monetary theory - Abstract:
- This thesis applies mechanism design to explore the roles of outside and inside money in achieving optimal allocations. Two chapters use settings that are related to random-matching models. The third uses an overlapping generations setting. In all three, a critical role is played by assumptions about whether people can commit to future actions and about how much, if any, of their histories is publicly known. A MODEL IN WHICH OUTSIDE AND INSIDE MONEY ARE ESSENTIAL I present a model in which both outside money and inside money are essential. The environment is a random-matching model of money where some people have publicly-observed histories and so can be monitored, while others have private histories and cannot be monitored. Those who are monitored issue inside money. The issuers of inside money can only be monitored imperfectly, however, because histories are observed only after a lag. I show via a mechanism design approach that for some parameters, there exist allocations that are achievable only when both outside and inside money are used. THE SIZE OF MEETINGS AND THE ROLE OF MONEY Double-coincidence problems are necessary for money to be essential. I amend a random-matching model with no commitment and no publicly- observable histories by making the number of people in a random meeting a parameter, denoted N. This is one way to parameterize the extent of the double-coincidence problem. I prove that as N approaches infinity, the beneficial role of money disappears. MECHANISM DESIGN IN FREEMAN'S MODEL OF PAYMENTS Freeman (1996a) claims to have an environment in which outside money is essential to repay debt. I dispute that claim by providing an alternative trading mechanism that does not use money to repay debt, but achieves optimal allocations. Moreover, the use of this alternative makes irrelevant the liquidity-providing institutions - a central bank or a private clearinghouse - whose existence Freeman claims to justify.