Endogenous supply of fiat money

We address whether reputation concerns can discipline the behavior of a self-interested agent who has a monopoly over the provision of fiat money. We obtain that when this agent can commit to a plan of action, there is a monetary equilibrium where it never overissues. We show, however, that such equilibrium is no longer possible when there is no commitment. This happens because the incentives this agent has to maintain a reputation for providing valuable currency disappear once its reputation is high enough. More generally, we prove that there is no monetary equilibrium where overissue happens only infrequently. We conclude by showing that imperfect memory can restore the positive result obtained in the presence of commitment.

Signaling in political budget cycles: How far are you willing to go?

This paper analyzes how heterogeneity in two dimensions, competency and character, a¤ects political budget cycles. Competency is the e¢ciency in running the government. Character is the degree of opportunism. In this expanded space, previous results in the literature on the separating nature of the signaling equilibrium hold if heterogeneity in opportunism is low. With high heterogeneity in opportunism, no separating equilibrium exists. Rather, the equilibrium is partially pooling: only extreme types can be distinguished.