Russell Wong is a Senior Analyst in the Funds Management and Banking Department at the Bank of Canada. Russell is a macro theorist whose primary research interests are the role of search and information frictions in financial markets, with applications to interbank markets, over-the-counter trading, payment and settlement. He also works on topics related to productivity and economic growth. Russell received his PhD in economics from Washington University in St Louis. He has taught undergraduate and graduate classes there and at Queen’s university.
Recent years have witnessed the advances of e-money systems such as Bitcoin, PayPal and various forms of stored-value cards. This paper adopts a mechanism design approach to identify some essential features of different payment systems that implement and improve the constrained optimal resource allocation.
What makes e-money more special than cash? Is the introduction of e-money necessarily welfare enhancing? Is an e-money system necessarily stable? What is the optimal way to design an efficient and stable e-money scheme?
Consider the monetary model of Lagos and Wright (JPE 2005) but with general preferences and general production. I show that preferences satisfying UXXUHH – (UXH)2 = 0 is a sufficient condition for the existence and uniqueness of monetary equilibrium with degenerate money distribution.