Staff Report 467

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Money Is an Experience Good: Competition and Trust in the Private Provision of Money

Ramon Marimon
Juan Pablo Nicolini - Senior Research Economist
Pedro Teles

Published July 20, 2012

Abstract
The interplay between competition and trust as efficiency-enhancing mechanisms in the private provision of money is studied. With commitment, trust is automatically achieved and competition ensures efficiency. Without commitment, competition plays no role. Trust does play a role but requires a bound on efficiency. Stationary inflation must be non-negative and, therefore, the Friedman rule cannot be achieved. The quality of money can be observed only after its purchasing capacity is realized. In this sense, money is an experience good.


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