An Idealized View of Financial Intermediation
29 Pages Posted: 6 Dec 2010
Date Written: 2007
We consider an environment where the general equilibrium assumption that every agent buys and sells simultaneously is relaxed. We show that fiat money can implement a Pareto optimal allocation only if taxes are type-specific. We then consider intermediated money by assuming that financial intermediaries whose liabilities circulate as money have an important identifying characteristic: they are widely viewed as default-free. The paper demonstrates that default-free intermediaries who issue deposit accounts with credit lines to consumers can resolve the monetary problem and make it possible for the economy to reach a Pareto optimum.
Keywords: Fiat Money, Cash-in-advance, Financial Intermediation
JEL Classification: E5, G2
Suggested Citation: Suggested Citation