Money and dynamic credit arrangements with private information

We construct a model with private information in which consumers write dyna mic contracts with financial intermediaries. A role for money arises due to random limited participation of consumers in the financial market. Without defection constraints, a Friedman rule is optimal, the mean and variabilit y of wealth tend to fall with inflation in the steady state, and the welfar e effects of inflation are very small. With defection constraints, the effe cts of inflation on the distribution of welfare and consumption are large, but the effect on average welfare is still small. The relaxation of defecti on constraints resulting from higher inflation can cause a substantial incr ease in the real interest rate. Journal of Economic Literature Classificati on Numbers: D8, E4, G2. (C) 2000 Academic Press.