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Money, intermediation, and banking

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  • Andolfatto, David
  • Nosal, Ed

Abstract

The business of money creation is conceptually distinct from that of intermediation. Yet, these two activities are frequently--but not always--combined together in the form of a banking system. We develop a simple model to examine the question: When is banking essential? There is a role for money due to a lack of record-keeping and a role for intermediation due to the existence of private information: both money and intermediation are essential. When monitoring costs associated with intermediation are sufficiently low, the two activities can be separated from one another. However, when monitoring costs are sufficiently high, a banking system that combines these two activities is essential.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 56 (2009)
Issue (Month): 3 (April)
Pages: 289-294

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Handle: RePEc:eee:moneco:v:56:y:2009:i:3:p:289-294

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Web page: http://www.elsevier.com/locate/inca/505566

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Keywords: Money Intermediation Banking;

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  1. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  2. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "Inside and outside money as alternative media of exchange," Proceedings, Federal Reserve Bank of Cleveland, pages 443-468.
  3. Nobuhiro Kiyotaki & John Moore, 2002. "Evil Is the Root of All Money," American Economic Review, American Economic Association, vol. 92(2), pages 62-66, May.
  4. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  5. Cavalcanti, R. & Erosa, A. & Temzelides, T., 1997. "Private Money and Reserve Management in a Random Matching Model," UWO Department of Economics Working Papers 9715, University of Western Ontario, Department of Economics.
  6. Berentsen, Aleksander & Camera, Gabriele & Waller, Christopher, 2007. "Money, credit and banking," Journal of Economic Theory, Elsevier, vol. 135(1), pages 171-195, July.
  7. Narayana R. Kocherlakota, 1996. "Money is memory," Staff Report 218, Federal Reserve Bank of Minneapolis.
  8. Bodenhorn, Howard, 1993. "Small-Denomination Banknotes in Antebellum America," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(4), pages 812-27, November.
  9. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  10. Bruce D. Smith & Warren E. Weber, 1998. "Private money creation and the Suffolk Banking System," Working Paper 9821, Federal Reserve Bank of Cleveland.
  11. Bruce D. Smith, 2003. "Taking intermediation seriously," Proceedings, Federal Reserve Bank of Cleveland, pages 1319-1377.
  12. Hicks, John, 1989. "A Market Theory of Money," OUP Catalogue, Oxford University Press, number 9780198287247.
  13. Klein, Benjamin, 1974. "The Competitive Supply of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(4), pages 423-53, November.
  14. Ricardo de O. Cavalcanti & Andrés Erosa & Ted Temzelides, 2005. "Liquidity, Money Creation And Destruction, And The Returns To Banking," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 675-706, 05.
  15. Ping He & Lixin Huang & Randall Wright, 2005. "Money And Banking In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 637-670, 05.
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Cited by:
  1. David Andolfatto, 2005. "On the Coexistence of Money and Bonds," 2005 Meeting Papers 9, Society for Economic Dynamics.

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