In this paper we argue that if monetary policy has insufficient deflation, private agents have incentives to set up alternative payment systems like fractionally backed bank deposits, which pay interest on the means of payment. In a competitive environment with free entry, these alternative...

A popular identifying assumption in structural VAR studies is that the monetary policy shock does not affect macroeconomic variables contemporaneously. We examine the consequences of using this identification strategy when the data-generating process is a basic Dynamic New Keynesian (DNK) model...