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A simple model of money and banking

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Author Info

  • David Andolfatto
  • Ed Nosal

Abstract

This article presents a simple environment that has banks creating and lending out money. The authors define money to be any object that circulates widely as a means of payment and a bank to be an agency that simultaneously issues money and monitors investments. While their framework allows private nonbank liabilities to serve as the economy's medium of exchange, they demonstrate that the cost-minimizing structure has a bank creating liquid funds. In practice, the vast bulk of the money supply consists of private debt instruments that are issued by banks. Thus, their model goes some way in addressing the questions of why private money takes the form it does, and why private money is typically supplied by banks.

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File URL: http://www.clevelandfed.org/research/Review/2001/simple.pdf
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Bibliographic Info

Article provided by Federal Reserve Bank of Cleveland in its journal Economic Review.

Volume (Year): (2001)
Issue (Month): Q III ()
Pages: 20-28

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Handle: RePEc:fip:fedcer:y:2001:i:qiii:p:20-28

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Related research

Keywords: Monetary theory ; Banks and banking;

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Cited by:
  1. Junfeng Qiu, 2011. "Bank money, aggregate liquidity, and asset prices," Annals of Economics and Finance, Society for AEF, vol. 12(2), pages 295-346, November.
  2. David Andolfatto & Ed Nosal, 2003. "A theory of money and banking," Working Paper 0310, Federal Reserve Bank of Cleveland.
  3. Hongfei Sun, 2007. "Banking, Inside Money and Outside Money," Working Papers 1146, Queen's University, Department of Economics.

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