Ricardo de O. Cavalcanti

Inside and outside money as alternative media of exchange

We study a random matching model of money in which a subset of people, called bankers, have known histories and the rest, called nonbankers, have unknown histories. Earlier, we showed that if there are no outside assets, then an optimal arrangement has bankers issuing objects, banknotes, that are used in trades involving nonbankers. Here, the same model is used to compare such exclusive use of inside money to the exclusive use of outside money. We show that the set of implementable outcomes using outside money is a strict subset of the set using inside money.

Private Money and Reserve Management in a Random Matching Model

In this paper, we develop a model of money and reserve‐holding banks. We allow for private liabilities to circulate as media of exchange in a random‐matching framework. Some individuals, which we identify as banks, are endowed with a technology to issue private notes and to keep reserves with a clearinghouse. Bank liabilities are redeemed according to a stochastic process that depends on the endogenous trades. We find conditions under which note redemptions act as a force that is sufficient to stabilize note issue by the banking sector.

Some benefits of cyclical monetary policy

In this paper, we present a simple random-matching model in which different seasons translate into different propensities to consume and produce. We find that the cyclical creation and destruction of money is beneficial for welfare under a wide variety of circumstances. Our model of seasons can be interpreted as providing support for the creation of the Federal Reserve System, with its mandate of supplying an elastic currency for the nation.

A monetary mechanism for sharing capital: Diamond and Dybvig meet Kiyotaki and Wright

A model is presented in which banks update public records, accept deposits of fiat money and intermediate capital. I show that inside money is more liquid than outside money, increasing the turnover rates of idle capital. The model offers a simple explanation for the dual role of financial institutions: Banks are monitored and can issue nominal assets upon request, which helps them to transfer capital in sufficiently high rates and to also become intermediaries. The model shares some features with those of Diamond and Dybvig [5], and Kiyotaki and Wright [7].

Counterfeiting as Private Money in Mechanism Design

We describe counterfeiting activity as the issuance of private money, one which is difficult to monitor. Our approach, which amends the basic random-matching model of money in mechanism design, allows a tractable welfare analysis of currency competition. We show that it is not efficient to eliminate counterfeiting activity completely. We do not appeal to lottery devices, and we argue that this is consistent with imperfect monitoring.

Efficient propagation of shocks and the optimal return on money

We study optimal allocations in an environment in which money is essential due to lack of commitment and anonymity of individuals. Because the economy features aggregate preference shocks, we apply a notion of implementability that allows for allocations with non-trivial business-cycle dynamics for the propagation of shocks. We show that history dependence is predicted by the theory of second best and becomes necessary for optimality when the degree of patience is neither too low nor too high. Our analysis concludes with a discussion of whether there is a role for the propagation of shocks in alternative economic environments.

Opposite policy implications in the theory of money and banking

The recent financial crisis creates a demand for welfare-based models of financial regulation and liquidity shortages. In this paper, we review policy implications from two cornerstone models and show that they imply different responses in terms of intertemporal returns of financial liabilities. In the first case, a version of the Cavalcanti and Wallace (1999), random-matching model, monitored agents are led to promote inflation in bank-issued money. In the second case, a sequential-service version of the Diamond and Dybvig (1983) model of bank runs with insolvency, increases in long-run returns can prevent bank runs by reducing the provision of liquidity.