On the private provision of fiat currency

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.euroecorev.2005.05.001 Byline: Aleksander Berentsen Abstract: This paper considers whether fiat money can be provided by a revenue-maximizing monopolist in an environment where money is essential. Two questions arise concerning the private supply of money: Is it feasible and is it optimal? Concerning the feasibility question, I show that the revenue-maximizing policy is time-consistent if the trading history of the issuer is public information and if money demanders respond to the revelation of defection by playing autarky. Concerning the optimality question, the model suggests that any private organization of the market for fiat currency is suboptimal. Author Affiliation: Economics Department, University of Basel, Basel, Switzerland Article History: Received 21 December 2004; Accepted 8 May 2005 Article Note: (footnote) [star] An early version of the paper has circulated under the title 'Time-Consistent Private Supply of Outside Paper Money'.