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Money and Dynamic Credit Arrangements with Private Information

Author

Listed:
  • S. Rao Aiyagari

    (University of Rochester)

  • Stephen D. Williamson

    (University of Iowa)

Abstract
We construct a model with private information in which consumers write dynamic contracts with financial intermediaries. A role for money arises due to random limited participation of consumers in the financial market. Without defection constraints, a Friedman rule is optimal, the mean and variability of wealth tend to fall in the steady state, and the welfare effects of inflation are very small. With defection constraints, it is optimal to eliminate currency entirely, the variability of wealth tends to rise with inflation, and the welfare effects of inflation are large.

Suggested Citation

  • S. Rao Aiyagari & Stephen D. Williamson, 1998. "Money and Dynamic Credit Arrangements with Private Information," Game Theory and Information 9802002, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpga:9802002
    Note: Type of Document - PDF; to print on Acrobat Reader; pages: 44 ; figures: included
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    97-19;

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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