ECON 4721, Money & Banking

Reference: Modeling Monetary Economics (2016, Fourth Edition, Cambridge University Press) by Bruce Champ, Scott Freeman and Joseph Haslag.

Consider the overlapping generations model with pairs of outer islands, each pair consisting of a debtor and a creditor island, as well as a central island. On every pair of outer islands, one young debtor is matched with one young creditor. In every period, first young debtors issue IOU's to young creditors in exchange for their goods, then all old agents visit central island to clear their debt, then young debtors sell their endowment to old creditors for fiat money. In which case is the activity of a clearinghouse on central island both meaningful and non-inflationary?

1.All creditors and debtors arrive on central island at the same time.

2.Creditors arrive on central island before debtors. Creditors can only carry fiat money whose supply is inelastic.

3.Creditors arrive before debtors, the clearinghouse can issue banknotes which are redeemed next period.

4.Creditors arrive before debtors, the clearinghouse can issue banknotes which are not redeemed next period.