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Modern Monetary Circuit Theory, Stability Of Interconnected Banking Network, And Balance Sheet Optimization For Individual Banks

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  • ALEXANDER LIPTON

    (Connection Science Fellow, MIT Connection Science, Media Lab, Massachusetts Institute of Technology, 77, Massachusetts Avenue, Cambridge, MA 02139, USA)

Abstract

A modern version of monetary circuit theory with a particular emphasis on stochastic underpinning mechanisms is developed. It is explained how money is created by the banking system as a whole and by individual banks. The role of central banks as system stabilizers and liquidity providers is elucidated. It is shown how in the process of money creation banks become naturally interconnected. A novel extended structural default model describing the stability of the Interconnected banking network is proposed. The purpose of bank capital and liquidity is explained. Multi-period constrained optimization problem for bank balance sheet is formulated and solved in a simple case. Both theoretical and practical aspects are covered.

Suggested Citation

  • Alexander Lipton, 2016. "Modern Monetary Circuit Theory, Stability Of Interconnected Banking Network, And Balance Sheet Optimization For Individual Banks," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 19(06), pages 1-57, September.
    • Handle: RePEc:wsi:ijtafx:v:19:y:2016:i:06:n:s0219024916500345
    DOI: 10.1142/S0219024916500345
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    6. Vadim Kaushansky & Alexander Lipton & Christoph Reisinger, 2016. "Numerical analysis of an extended structural default model with mutual liabilities and jump risk," Papers 1701.00030, arXiv.org.
    7. Vadim Kaushansky & Alexander Lipton & Christoph Reisinger, 2017. "Transition probability of Brownian motion in the octant and its application to default modeling," Papers 1801.00362, arXiv.org, revised May 2018.
    8. Alexander Lipton, 2017. "Blockchains and Distributed Ledgers in Retrospective and Perspective," Papers 1703.01505, arXiv.org.
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    10. Alexander Lipton & Vadim Kaushansky & Christoph Reisinger, 2018. "Semi-analytical solution of a McKean-Vlasov equation with feedback through hitting a boundary," Papers 1808.05311, arXiv.org, revised Aug 2018.
    11. Matheus R Grasselli & Alexander Lipton, 2018. "The Broad Consequences of Narrow Banking," Papers 1810.05689, arXiv.org.
    12. Matheus R. Grasselli & Alexander Lipton, 2018. "On the Normality of Negative Interest Rates," Papers 1808.07909, arXiv.org.

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