E-Money: Legal Restrictions Theory and Monetary Policy

44 Pages Posted: 19 Jun 2018

See all articles by Ohik Kwon

Ohik Kwon

Bank of Korea - Economic Research Institute

Jaevin Park

University of Mississippi - Department of Economics

Date Written: June 19, 2018

Abstract

This paper studies the efficiency of electronic money system by focusing on the decentralized setting of issuance. In the model competitive money issuers can create small denominated money (or e-money) backed by large denominated government bonds. Under the decentralized environment the issuers can also produce counterfeit collateral at a proportional cost. This moral hazard incentive requires the more government bonds for the issuers to provide the same amount of money. In general equilibrium the individual money issuers do not internalize the aggregate effect of money supply. Thus the equilibrium allocation is constrained inefficient with the moral hazard incentives. We suggest a pigouvian tax on money supply to correct the externality in aggregate money supply.

Keywords: Limited Commitment, Moral Hazard, Externality, Open-market Operations

JEL Classification: E4, E5

Suggested Citation

Kwon, Ohik and Park, Jaevin, E-Money: Legal Restrictions Theory and Monetary Policy (June 19, 2018). Bank of Korea WP 2018-17. Available at SSRN: https://ssrn.com/abstract=3198493 or http://dx.doi.org/10.2139/ssrn.3198493

Ohik Kwon (Contact Author)

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

Jaevin Park

University of Mississippi - Department of Economics ( email )

371 Holman Hall
University, MS 38677
United States

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