Money. LECTURE TOPICS What Is Money? The Monetary System The Federal Reserve System
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- Slide 1
- Money
- Slide 2
- LECTURE TOPICS What Is Money? The Monetary System The Federal
Reserve System
- Slide 3
- 11.1 WHAT IS MONEY? Definition of Money Money Any commodity or
token that is generally accepted as a means of payment. Any
Commodity or Token Something that can be recognized Divided up into
small parts. [Also desirable: hard to counterfeit, low resource
cost, safe and easy to transport/transfer, durable, easy to
assemble in large or small amounts]
- Slide 4
- 11.1 WHAT IS MONEY? Generally Accepted It can be used to buy
anything and everything. Means of Payment A means of payment is a
method of settling a debt Modern, multi-purpose money performs
three vital functions: Medium of exchange Unit of account Store of
value [Historically, these were often separate!]
- Slide 5
- 11.1 WHAT IS MONEY? Medium of Exchange Medium of exchange
Something that is generally accepted in return for goods and
services. Without money, you would have to exchange goods and
services directly for other goods and services an exchange called
barter. Money is the common denominator you exchange things for
money, then money for things.
- Slide 6
- 11.1 WHAT IS MONEY? Unit of Account A unit of account is an
agreed-upon measure for stating the prices of goods and services,
and keeping records of credits and debts. Table 11.1 shows how a
unit of account simplifies price comparisons.
- Slide 7
- 11.1 WHAT IS MONEY? Store of Value A store of value is any
commodity or token that can be held and exchanged later for goods
and services The store of value characteristic allows us to move
purchasing power, wealth, through time without having to hold real
resources [which may be both costly and wasteful]. If people dont
have confidence in money or financial assets, they will hold real
assets [e.g. gold, land] instead, and this may reduce the amount of
productive physical capital.
- Slide 8
- 11.1 WHAT IS MONEY? Money Today Money in the world today is
called fiat money. Fiat money Objects that are money because the
law orders them to be money. The objects that we use as money today
are: Currency Checkable deposits at banks and other financial
institutions [fiat is Latin for let it be or make it]
- Slide 9
- 11.1 WHAT IS MONEY? Currency The notes (dollar bills) and coins
that we use in the United States today are known as currency. Notes
are money because the government declares them to be with the words
printed on every dollar bill: This note is legal tender for all
debts, public and private.
- Slide 10
- 11.1 WHAT IS MONEY? Checkable Deposits Deposits on which you
can write a check at banks, credit unions, savings banks, and
savings and loan associations are also money. Checkable deposits
are money because they can be converted into currency on demand and
are used directly to make payments by writing checks or using debit
cards.
- Slide 11
- 11.1 WHAT IS MONEY? Currency in a Bank Is Not Money Checkable
bank deposits are one form of money, and currency outside the banks
is another form. Currency inside the banks is not money. When you
get some cash from the ATM, you convert your bank deposit into
currency. Checkable Deposits Are Money but Checks Are Not Checks
are not money; they are an instruction to the bank or other
financial institution to pay money to the payee named on the
check.
- Slide 12
- 11.1 WHAT IS MONEY? Figure 11.1 shows what happens when a
person pays by writing a check. Initially, Colleen has $500 in her
bank account and Rockys Rollers has $3,000 in its bank
account.
- Slide 13
- 11.1 WHAT IS MONEY? Colleen buys some inline skates for $200
and writes a check to pay for them. The balance on Colleens bank
account decreases by $200 and the balance on Rockys bank account
increases by $200.
- Slide 14
- 11.1 WHAT IS MONEY? The bank deposits are money, but the check
is not money.
- Slide 15
- 11.1 WHAT IS MONEY? Credit Cards, Debit Cards, E-Checks, and E-
Cash Credit Cards A credit card is not money because it does not
make a payment. When you use your credit card, you create a debt
(the outstanding balance on your card account), which you
eventually pay off with money.
- Slide 16
- 11.1 WHAT IS MONEY? Debit Cards A debit card is not money. It
is like an electronic check. E-Checks An e-check is not money. It
is an electronic equivalent of a paper check. E-Cash Works like
money and when it becomes widely acceptable, it will be money.
- Slide 17
- 11.1 WHAT IS MONEY? Official Measures of Money: M1 and M2 M1
Currency and travelers checks plus checkable deposits owned by
individuals and businesses. M2 M1 plus savings deposits and small
time deposits, money market funds, and other deposits.
- Slide 18
- 11.1 WHAT IS MONEY? Figure 11.2 shows two measures of money. M1
Currency and travelers checks Checkable deposits
- Slide 19
- 11.1 WHAT IS MONEY? M2 M1
- Slide 20
- 11.1 WHAT IS MONEY? Savings deposits M2 M1 Money market funds
and other deposits Small time deposits
- Slide 21
- Reality check Currency and travelers checks$539 billion
Population of the USA[approx]280 million Currency and travelers
checks per person is $(539/280)thousand = $1,925 per man, woman,
and child in the US. Do you have your $1,925 in cash? Do your
little sister and your grandmother? What gives even given drug and
other illegal businesses, and cash intensive activities like bars,
this does not make sense. Where is all the currency and why? What
does this mean for the use of M1 as an indicator of things
happening in the US economy?
- Slide 22
- Are M1 and M2 Really Money? The test of whether something is
money is whether it serves as a means of payment. M1 passes this
test and is money. Some savings deposits, time deposits, and money
market funds do not serve as a means of payment and technically are
not money. Economists often refer to M1 as narrow money and M2 as
broad money. There are many different measures of financial assets,
ranging from M0 [monetary base] up to M7 or above; dont worry about
anything above M2! 11.1 WHAT IS MONEY?
- Slide 23
- Figure 11.3 shows the changing composition of money in the
United States. During the 1990s, the proportion of money held as
currency increased.
- Slide 24
- 11.1 WHAT IS MONEY? The proportion of money held as checkable
deposits has decreased.
- Slide 25
- 11.2 THE MONETARY SYSTEM The monetary system consists of: The
Federal Reserve The banks and other institutions that accept
deposits and that provide the services that enable people and
businesses to make and receive payments.
- Slide 26
- Figure 11.4 shows the institutions of the monetary system. The
Federal Reserve regulates and influences the activities of the
commercial banks, thrift institutions, and money market funds,
whose deposits make up the nations money. 11.2 THE MONETARY
SYSTEM
- Slide 27
- Commercial Banks A commercial bank is a firm that is licensed
by the Comptroller of the Currency in the U.S. Treasury (or by a
state agency) to accept deposits and make loans. About 8,600
commercial banks operate in the United States today. Because of
mergers, this number is down from 13,000 a few years ago.
- Slide 28
- 11.2 THE MONETARY SYSTEM Types of Deposits Checkable deposits
Savings deposits Time deposits
- Slide 29
- 11.2 THE MONETARY SYSTEM Profit and Prudence: A Balancing Act
The goal of a commercial bank is to maximize the long-term wealth
of its stockholders. To achieve this goal, a bank must be prudent
in the way it uses its depositors funds and balance security for
the depositors against profit for its stockholders.
- Slide 30
- 11.2 THE MONETARY SYSTEM Cash Assets A banks cash assets
consist of its reserves and funds that are due from other banks as
payments for checks that are being cleared. A banks reserves
consist of the currency in the banks vaults plus the balance in its
reserve account at a Federal Reserve Bank.
- Slide 31
- 11.2 THE MONETARY SYSTEM The Fed requires the banks to hold a
minimum percentage of deposits as reserves, called the required
reserve ratio. Reserves that exceed those needed to meet the
required reserve ratio are called excess reserves.
- Slide 32
- 11.2 THE MONETARY SYSTEM Interbank Loans When banks have excess
reserves, they can lend them to other banks that are short of
reserves in an interbank loans market. The interbank loans market
is called the federal funds market and the interest rate in that
market is the federal funds rate. The Feds policy actions target
the federal funds rate, i.e. when the Fed changes its monetary
policy, it is trying to change the federal funds rate, the interest
rate at which banks lend and borrow reserves. Most short-term
interest rates are tied to that rate.
- Slide 33
- 11.2 THE MONETARY SYSTEM Securities and Loans Securities held
by banks are bonds issued by the U.S. government and by other
large, safe, organizations. A bank earns a moderate interest rate
on securities, but it can sell them quickly if it needs cash. Loans
are the funds that banks lend to businesses and individuals and
include outstanding credit card balances. Loans earn the highest
interest rate but usually cannot be called in before the agreed
date meaning the bank cannot get its money back earlier than the
date the loan matures.
- Slide 34
- 11.2 THE MONETARY SYSTEM Bank Deposits and Assets: The Relative
Magnitudes Checking deposits at commercial banks in the United
States, included in M1, are about 15 percent of total deposits. The
other 85 percent of deposits are savings deposits and time
deposits, which are part of M2.
- Slide 35
- 11.2 THE MONETARY SYSTEM Figure 11.5 shows the commercial banks
deposits and assets at the end of 2000. The commercial banks had
$600 billion in checkable deposits, and $3,300 in other
deposits.
- Slide 36
- 11.2 THE MONETARY SYSTEM The banks cash assets were $300
billion, bonds were $1,350 billion, and loans were $2,000 billion.
interbank loans were $250 billion,
- Slide 37
- 11.2 THE MONETARY SYSTEM Thrift Institutions A savings and loan
association (S&L) is a financial institution that accepts
checkable deposits and savings deposits and that makes personal,
commercial, and home-purchase loans. A savings bank is a financial
institution that accepts savings deposits and makes mostly consumer
and home-purchase loans.
- Slide 38
- 11.2 THE MONETARY SYSTEM A credit union is a financial
institution owned by a social or economic group, such as a firms
employees, that accepts savings deposits and makes mostly consumer
loans. The total deposits of thrift institutions in January 2001
were $900 billion. Of these deposits, $100 billion were checkable
deposits in M1 and the rest were savings deposits and time deposits
in M2.
- Slide 39
- 11.2 THE MONETARY SYSTEM Money Market Funds A money market fund
is a financial institution [mutual fund] that obtains funds by
selling shares and uses these funds to buy assets such as U.S.
Treasury bills. Money market fund shares act like bank deposits.
Shareholders can write checks on their money market fund accounts
to at least some extent. There are restrictions on most of these
accounts [e.g. minimum size of check, number of checks allowed per
month].
- Slide 40
- 11.2 THE MONETARY SYSTEM Relative Size of Monetary Institutions
Commercial banks provide most of the nations bank deposits. Figure
11.6 shows the deposits behind M1 and M2
- Slide 41
- 11.2 THE MONETARY SYSTEM Almost one half (49 percent ) of M1
consists of currency. Checking deposits at commercial banks are 41
percent of M1. Deposits at the thrift institutions are 10 percent
of M1.
- Slide 42
- 11.2 THE MONETARY SYSTEM M1 is 22 percent of M2. Savings
deposits and time deposits at commercial banks are another 43
percent of M2.
- Slide 43
- 11.2 THE MONETARY SYSTEM deposits at thrift institutions
provide 16 percent, and money market funds provide 19 percent of
M2.
- Slide 44
- 11.2 THE MONETARY SYSTEM The Economic Functions of Monetary
Institutions The institutions of the monetary system earn their
incomes by performing functions that people value and are willing
to pay for. The four most important from our point of view are:
Create Liquidity Lower the cost of lending and borrowing Pool risks
Make payments
- Slide 45
- 11.2 THE MONETARY SYSTEM Create Liquidity A liquid asset is an
asset that can be easily, and with certainty, converted into money.
A bank creates liquid assets by borrowing short and lending long.
Borrowing short means accepting deposits and standing ready to
repay them whenever the depositor requests the funds. Lending long
means making loan commitments for a longer term than the borrowing
that is financing them.
- Slide 46
- 11.2 THE MONETARY SYSTEM Lower Costs Banks lower the cost of
lending and borrowing. People with funds to lend can easily find
the type of bank deposit that matches their plans. People who want
to borrow can do so by using the facilities offered by banks. Banks
profit because people are willing to make deposits at lower
interest rates than the interest rates that the banks can earn on
their loans the difference is known as the interest spread.
- Slide 47
- 11.2 THE MONETARY SYSTEM Pool Risk By lending to a large number
of businesses and individuals, a bank lowers the average risk it
faces. The interest rate on a bank loan is set to ensure that the
amount earned on the loans that do get repaid is sufficiently high
to pay for ones that dont get repaid. This means that for
depositors, who are providing the funds loaned, their deposits are
close to riskless [and in any case are insured by FDIC, so are
riskless], even though the individual loans the bank makes are each
risky.
- Slide 48
- 11.2 THE MONETARY SYSTEM Make Payments The check-clearing
system The main mechanism provided by the banks. The banks collect
a fee for each check that they clear. The credit card payments
system The banks collect a fee for every credit card
transaction.
- Slide 49
- 11.3 THE FEDERAL RESERVE SYSTEM The Federal Reserve System The
Federal Reserve System is the central bank of the United States. A
central bank is a bank for bankers, that provides banking services
to banks and regulates financial institutions and markets. Usually
a central bank has some formal relationship with its countrys
government, although in day-to-day policy terms it may be
independent of the government of the day. The Fed conducts the
nations monetary policy, which means that it adjusts its policy,
and thereby the quantity of money in the economy, as it thinks
appropriate.
- Slide 50
- 11.3 THE FEDERAL RESERVE SYSTEM Figure 11.7 shows the Federal
Reserve districts. The nation is divided into 12 Federal Reserve
districts, each with a Federal Reserve Bank. The Board of Governors
of the Federal Reserve System is located in Washington, D.C.
- Slide 51
- 11.3 THE FEDERAL RESERVE SYSTEM The Structure of the Federal
Reserve System The key elements in the structure of the Federal
Reserve are: The Board of Governors The Regional Federal Reserve
Banks The Federal Open Market Committee
- Slide 52
- 11.3 THE FEDERAL RESERVE SYSTEM The Board of Governors Seven
members. Appointed by the President of the United States and
confirmed by the Senate. Each for a 14-year term. The President
appoints one of the board members as Chairman for a term of four
years, which is renewable.
- Slide 53
- 11.3 THE FEDERAL RESERVE SYSTEM The Regional Federal Reserve
Banks There are 12 Federal Reserve banks. One for each of 12
Federal Reserve districts. Each Federal Reserve Bank has nine
directors, three of whom are appointed by the Board of Governors
and six of whom are elected by the commercial banks in the Federal
Reserve district. The Federal Reserve Bank of New York implements
the Feds most important policy decisions.
- Slide 54
- 11.3 THE FEDERAL RESERVE SYSTEM The Federal Open Market
Committee The Federal Open Market Committee (FOMC) is the Feds main
policy-making committee. The FOMC consists of The chairman and
other six members of the Board of Governors. The president of the
Federal Reserve Bank of New York. Four presidents of the other
regional Federal Reserve banks (on a yearly rotating basis). The
FOMC meets approximately every six weeks.
- Slide 55
- 11.3 THE FEDERAL RESERVE SYSTEM Figure 11.8 shows the structure
of the FOMC. The members are the Chairman of the Board of Governors
(currently Alan Greenspan), and the other six members of the
board,
- Slide 56
- 11.3 THE FEDERAL RESERVE SYSTEM The president of the New York
Fed, and four of the other regional Fed presidents. Staff
economists advise the FOMC.
- Slide 57
- 11.3 THE FEDERAL RESERVE SYSTEM The Board of Governorsnot the
FOMCsets required reserve ratios and the discount rate. The FOMC
makes decisions about open market operations and the interest rate
target.
- Slide 58
- 11.3 THE FEDERAL RESERVE SYSTEM The Feds Power Center The
chairman of the Board of Governors has the largest influence on the
Feds monetary policy. The current chairman is Alan Greenspan:
Appointed by President Reagan in 1987. Reappointed for a second
term by President Bush in 1992. Reappointed for a third term by
President Clinton in 1996. Reappointed for a fourth term by
President Clinton in 2000.
- Slide 59
- 11.3 THE FEDERAL RESERVE SYSTEM The chairmans power and
influence stem from three sources: Controls the agenda and
dominates the FOMC meeting Has day-to-day contact with staff of
economists Is the spokesperson for the Fed
- Slide 60
- 11.3 THE FEDERAL RESERVE SYSTEM The Feds Policy Tools The Fed
has three main policy tools, in theory, although as we will see
only one really matters: Required reserve ratios Discount rate Open
market operations
- Slide 61
- 11.3 THE FEDERAL RESERVE SYSTEM Required Reserve Ratios Banks
hold reserves. These reserves are: Currency in the institutions
vaults and ATMs Deposits held with other banks or with the Fed
itself. Banks and thrifts are required to hold a minimum percentage
of deposits as reserves, a required reserve ratio. If the required
reserve ratio is 10%, for every $10 of deposits the banks must have
$1 of reserves. This also means that for each $1 of reserves they
have, they could have up to $10 of deposits.
- Slide 62
- 11.3 THE FEDERAL RESERVE SYSTEM Table 11.2 shows the required
reserve ratios in 2001. Think about the effect of changing the
required reserve ratio, say from 10% to 12.5%. At 10%, $1 of
reserves allows $10 of deposits; at 12.5%, $1 of reserves allows
only $(1/.125) = $8 of deposits. This would be a large and
discontinuous change in the money supply, so in rich countries like
the US changes in the required reserve ratio in practice are not
used as a way to change the money supply [and many countries dont
even have required reserve ratios any more, they just rely on the
banks to be sensible, and prudential regulation of banks.]
- Slide 63
- 11.3 THE FEDERAL RESERVE SYSTEM Discount Rate The interest rate
at which the Fed stands ready to lend reserves to commercial banks.
A change in the discount rate begins with a proposal to the FOMC by
at least one of the 12 Federal Reserve banks. If the FOMC agrees
that a change is required, it proposes the change to the Board of
Governors for its approval. However, in practice, banks dont
usually borrow from the Fed, so the discount rate acts as a signal
but has no practical effect on the money supply. The interest rate
on some loans is contractually linked to the discount rate, and the
target federal funds rate is usually 0.5% higher than the discount
rate.
- Slide 64
- 11.3 THE FEDERAL RESERVE SYSTEM Open Market Operations The
purchase or sale of government securities by the Federal Reserve in
the open market. [The Fed is forbidden from buying securities
directly from the federal government.] When the Fed buys
securities, it pays with a check drawn on itself. This increases
the deposits with the Fed of the commercial bank through which the
check reaches the Fed, and thereby increases the reserves available
to the banking system. With more reserves, more deposits are
supportable, and excess reserves will be lent out, creating more
deposits. When the Fed sells securities, it destroys reserves.
- Slide 65
- 11.3 THE FEDERAL RESERVE SYSTEM The Monetary Base The monetary
base is the sum of coins, Federal Reserve bills, and banks reserves
at the Fed. The monetary base is so called because it acts like a
base that supports the nations money. The larger the monetary base,
the greater is the quantity of money that it can support. Except
for the coins [issued by the Treasury], our monetary base consists
entirely of I.O.U.s from the Fed, so the Fed can enlarge or reduce
it as it wants.
- Slide 66
- 11.3 THE FEDERAL RESERVE SYSTEM Federal reserve bills and banks
deposits at the Fed are liabilities of the Fed, and the Feds assets
back these liabilities. The Feds assets are what it owns, and the
Feds liabilities are what it owes. The Feds three main assets are:
Gold and foreign exchange U.S. government securities Loans to banks
Securities are most of the assets, and loans to banks are
negligible in amount.
- Slide 67
- The Feds Balance Sheet, 3 January 2001 Gold and foreign
exchange13Federal Reserve notes593 U.S. government
securities512Banks deposits17 Loans to banks0.01Other liabilities
(net)25** Other Assets110* Total assets635Total liabilities
(net)635 [*repos, float, buildings etc; **govt and foreign
deposits, capital, other] AssetsLiabilities(billions of
dollars)
- Slide 68
- 11.3 THE FEDERAL RESERVE SYSTEM Figure 11.9 shows the monetary
base and its composition. The monetary base is the sum of banks
deposits at the Fed, coins, and Federal Reserve notes (bills). Most
of the monetary base consists of Federal Reserve notes.
- Slide 69
- 11.3 THE FEDERAL RESERVE SYSTEM Why Are Dollar Bills a
Liability of the Fed? When bank notes were invented, they gave
their owner a claim on the gold reserves of the issuing bank. When
a bank issued a note, it was holding itself liable to convert the
note into gold or silver. Modern bank notes are nonconvertible. A
nonconvertible note is not convertible into any commodity and
obtains its value by government fiathence the term fiat money.
Federal Reserve bills are backed by the Feds holdings of U.S.
government securities.
- Slide 70
- 11.3 THE FEDERAL RESERVE SYSTEM How The Feds Policy Tools Work:
A Quick First Look By increasing the required reserve ratio, the
Fed could force the banks to hold a larger quantity of monetary
base. By raising the discount rate, the Fed can make it more costly
for the banks to borrow reservesborrow monetary base. By selling
securities in the open market, the Fed can decrease the monetary
base. This is how the Fed actually implements monetary policy, and
gets close to its announced target Federal Funds Rate.
- Slide 71
- 11.3 THE FEDERAL RESERVE SYSTEM By decreasing the required
reserve ratio, the Fed could permit the banks to hold a smaller
quantity of monetary base. By lowering the discount rate, the Fed
can make it less costly for the banks to borrow monetary base. By
buying securities in the open market, the Fed can increase the
monetary base. Again, this is how the Fed actually implements its
monetary policy, and gets close to its announced target Federal
Funds Rate.
- Slide 72
- Private Electronic Money
- Slide 73
- Previous work on private electronic money Williamson (1999),
Temzelides and Williamson (2001) Random matching model with
infinitely lived agents. All currencies are indivisible. Issued by
financial intermediaries. Surrogate of fiat money. Discount:
Location; Clearing; Information frictions. Comments by Schreft
(2001): Insight for historical experience. But not for modern
system of private electronic money. No attention paid to technical
requirements of the network.
- Slide 74
- Our Concept of Private Electronic Money: Issued by private
firms, not through financial intermediaries. Its own denomination
(not a surrogate of fiat money). Debt: used by firms to finance
investment. Commodity backed: redeemable in a basket of final goods
produced by issuer. Circulating real option: it can be exercised by
holders. Low transaction cost. Used for any size of
transaction.
- Slide 75
- Our questions at this stage: Can both local and global
electronic currencies circulate simultaneously? And how? Can both
electronic currencies and fiat money circulate in equilibrium?
General questions: What are the characteristics that these
electronic currencies must have in order for them to circulate? Can
these electronic currencies circulate together with fiat money? Can
we engineer an ideal money?
- Slide 76
- The Environment Freeman (1996) payment system with Smith type
of Diamond-Dybvig relocation. Heterogeneous agents that are
separated in two outer networks. Centralized network: clearing,
contracts can be enforced. Some agents face the possibility of
future relocation. Two private electronic currencies are issued:
one being local and the other being global. Taxes must be paid
using fiat money.
- Slide 77
- Agents in this economy: Creditors Producers Microsoft
(continuum) Kleenex (continuum) Network-2 agents
- Slide 78
- Figure 1: Central Network and Outer Networks Network 1 Network
2 Creditors Microsoft producers Kleenex producers Network 2 agents
Central Network
- Slide 79
- Trade and Travel Patterns Each period has two parts. First part
of the period: In Network 1: Young creditors Young Microsoft
producers Young creditors Young Kleenex producers Old creditors
travel to the Central Network. In Central Network: Arrived old
creditors pay tax using fiat money. They learn whether they must
relocate to Network 2 or not. If relocate, they sell Kleenex money
for Microsoft money in the secondary market; travel to Network 2.
If not, they buy Kleenex money using Microsoft money; receive a
transfer in fiat money from the monetary authority; travel back to
Network 1. i.e. Relocated old creditors Un-relocated old
creditors
- Slide 80
- Trade and Travel Patterns Second part of the period: In Network
2: Old relocated creditors Young Network 2 agents Young Network 2
agents travel to Network 1. In Network 1: Old un-relocated
creditors Young creditors Old Microsoft producers produce. Old
Microsoft producers pay back debt: Old Microsoft producers Old
un-relocated creditors Old Microsoft producers Young Network 2
agents Old Kleenex producers produce. Old Kleenex producers pay
back debt: Old Kleenex producers Old un-relocated creditors
- Slide 81
- s. t. The Creditors Problem Endowed with y units of a specific
good when young. Derive utility only from consuming when old If
relocate If does not relocate
- Slide 82
- Microsoft Producers Problem Endowed only with a
Microsoft-specific investment technology that requires the
creditors endowment good. Issue Microsoft electronic money when
young, promise redemption rate r M. Produce Microsoft good when old
using a Microsoft-specific production technology. When old, consume
whatever is left from their production after redeeming Microsoft
electronic currency.
- Slide 83
- Kleenex Producers Problem Endowed only with a Kleenex-specific
investment technology that requires the creditors endowment good.
Issue Kleenex electronic money when young, promise redemption rate
r K. Produce Kleenex good when old using a Kleenex-specific
production technology. When old, consume whatever is left from
their production after redeeming Kleenex electronic currency.
- Slide 84
- Network 2 Agents The Monetary Authority Sell their endowment of
nuts in exchange for Microsoft electronic money. Redeem Microsoft
electronic money and consumes Microsoft composite good.
- Slide 85
- Equilibrium We can summarize the equilibrium condition of the
system as:
- Slide 86
- Numerical Examples In order to show existence and some
equilibrium properties, we provide the results of 2 numerical
examples 1.Loglinear utility 2.CRRA utility In both cases: q is
decreasing in the probability of relocation S m is increasing in
the probability of relocation S k is decreasing in the probability
of relocation
- Slide 87
- 1. A Loglinear Utility Function
- Slide 88
- Slide 89
- Slide 90
- Slide 91
- 2. A CRRA utility function = parameter of risk aversion Figure
3. Shares of Microsoft and Kleenex electronic money in the young
creditor's portfolio (%) 0 10 20 30 40 50 60 70 80 90 100
0.00.10.20.30.40.50.60.70.80.91.0 Sm - =0.5 Sk - =0.5 Sm - =1.5 Sk
- =1.5 Sm - =3 Sk - =3
- Slide 92
- Figure 4. Price of Kleenex electronic money in terms of
Microsoft electronic money (q) 0.0 0.2 0.4 0.6 0.8 1.0 1.2
0.00.10.20.30.40.50.60.70.80.91.0 =0.5 =1.5 =3
- Slide 93
- Conclusions Both local and global electronic currencies
circulate in equilibrium along with fiat money. Depending on
several factors, local electronic currency can be sold with a
premium or discount. Monetary authority s role in clearing and
supervising Secondary market for electronic currencies proves to be
welfare improving.
- Slide 94
- Extensions Introduce default risk in the redemption of
electronic money. Add X-men: introduce privacy and anonymity as new
transactional advantage of electronic currencies.