Working Paper

Money and finance with costly commitment

Abstract: The authors develop a variant of Townsend's turnpike model where the trading friction is related to a commitment problem rather than spatial separation alone. Specifically, expenditure on financial services is necessary to ensure commitment. When commitment is costless, the equilibrium allocation is equivalent to that from an Arrow sequential markets equilibrium. When commitment is prohibitively expensive, the allocation is similar to the Townsend equilibrium. The authors use numerical examples to study the consequences of costly commitment for co-existence of money and credit, asset pricing, welfare implications of currency and variations in its growth rate, and the relationships between income and financial development.

Keywords: Financial services industry; Money theory; Velocity of money;

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Working Papers

Publication Date: 1996

Number: 96-8