Liquidity, Money Creation And Destruction, And The Returns To Banking
AbstractWe build on our earlier model of money in which bank liabilities circulate as a medium of exchange. We investigate optimal bank behavior and the resulting provision of liquidity under a range of central bank regulations. In our model, banks issue inside money under fractional reserves, facing the possibility of excess redemptions. Banks consider the float resulting from money creation and make reserve-management decisions that affect aggregate liquidity conditions. Numerical examples demonstrate positive bank failure rates when returns to banking are low. Central bank interventions may improve banks' returns and welfare through a reduction in bank failure. Copyright 2005 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.
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Bibliographic InfoArticle provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.
Volume (Year): 46 (2005)
Issue (Month): 2 (05)
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Other versions of this item:
- de O. Cavalcanti, Ricardo & Erosa, Andrés & Temzelides, Ted, 2004. "Liquidity, money creation and destruction, and the returns to banking," Working Paper Series 0394, European Central Bank.
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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