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``To Furnish an Elastic Currency'': Banking, Aggregate Risk, and Welfare

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Author Info
Michael Loewy (University of South Florida)

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Abstract

The Federal Reserve Act calls upon the newly created Banks "... to furnish an elastic currency..." since such action was thought to be welfare improving during times of high currency demand. This paper considers the welfare implications of an "elastic currency" regime within the context of an overlapping generations model of fiat money that includes banks that face aggregate risk. Although in the economy's stationary equilibrium the bank chooses to hold both fiat currency and illiquid capital in its portfolio, it would prefer to hold additional amounts of currency (were they available) during periods of high withdrawal demand. To remedy this problem, a central bank is introduced that offers zero-interest, intraperiod loans of currency via a discount window. When the central bank optimally chooses the size of the loan, it is shown that the resulting stationary equilibrium supports the economy's "golden rule" allocation.

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Publisher Info
Article provided by Berkeley Electronic Press in its journal Topics in Macroeconomics.

Volume (Year): 3 (2003)
Issue (Month): 1 ()
Pages: 1052-1052
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Handle: RePEc:bep:mactop:v:3:y:2003:i:1:p:1052-1052

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Related research
Keywords: Banking Elastic Currency Central Bank

Find related papers by JEL classification:
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

References listed on IDEAS
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