Abstract
Abstract 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.
Highlights
This paper uses the assumption that ...nancial intermediaries are default-free to set up a perfect world where intermediation can e¤ortlessly overcome the monetary problem created by the friction in our model
In the ...rst section of the paper we found that, whether a planner chooses to redistribute wealth or not –that is, whether b0 is a vector of zeros or not – the stationary equilibrium of the economy is a Pareto optimum
D^it( ; y) is the equilibrium credit constraint when the equilibrium allocation is the transfer-free Pareto optimum. The properties of this credit constraint are established in the following lemma: Lemma 6 Given a transfer-free Pareto optimal allocation, the credit constraint, d^it( ; y), for an agent of type i = fj[0]; yg (i) does not depend on an agent’s history, (ii) is decreasing in an agent’s endowment level, y, where d^it( ; y) < pty for all i, (iii) is decreasing in and (iv) in the limit as ! 1, d^it( ; y) = 1. This result allows us to demonstrate, ...rst, that a Pareto optimum can be implemented by enforceable debt contracts in an intermediated credit equilibrium, and, second, that if is su¢ ciently high this Pareto optimal allocation can be implemented using a schedule of credit constraints that does not distinguish between the di¤erent types of agents, i
Summary
The time horizon is in...nite, and each period is divided into two sub-periods. There are n goods indexed by j 2 f1; :::; ng, and these goods perish in each sub-period. Every consumer’s preferences are given by the period utility function, Xn U (c) = u (cj) j=1 where cj is the agent’s consumption of good j. Once the agents have been divided into ...rst sub-period buyers and sellers at date t, each agent has a role in the goods market: t 2 fB; Sg where B represents a ...rst sub-period buyer and S a ...rst sub-period seller. This uncertainty is realized at the start of each period and generates a history for each agent, f 0; 1; :::g. In this environment all of a consumer’s choice variables can depend both on the consumer’s type and on the consumer’s history of being a ...rst sub-period buyer or seller
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