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Private money and reserve management in a random matching model

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  • Ricardo Cavalcanti
  • Andres Erosa
  • Ted Temzelides

Abstract

The authors introduce an element of centralization in a random matching model of money that allows for private liabilities to circulate as media of exchange. Some agents, which the authors identify as banks, are endowed with the technology to issue notes and to record-keep reserves with a central clearinghouse, which they call the treasury. The liabilities are redeemed according to a stochastic process that depends on the endogenous trades. The treasury removes the banking technology from banks that are not able to meet the redemptions in a given period. This, together with the market incompleteness, gives rise to a reserve management problem for the issuing banks. The authors demonstrate that "sufficiently patient" banks will concentrate on improving their reserve position instead of pursuing additional issue. The model provides a first attempt to reconcile limited note issue with optimizing behavior by banks during the National Banking Era.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 97-24.

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Date of creation: 1997
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Handle: RePEc:fip:fedpwp:97-24

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Keywords: Money theory;

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  1. Aiyagari, S Rao & Wallace, Neil, 1991. "Existence of Steady States with Positive Consumption in the Kiyotaki-Wright Model," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(5), pages 901-16, October.
  2. Diamond, Peter, 1990. "Pairwise Credit in Search Equilibrium," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(2), pages 285-319, May.
  3. Green, Edward-J, 1997. "Money and Debt in the Structure of Payments," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 15(1), pages 63-87, May.
  4. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(4), pages 927-54, August.
  5. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(1), pages 1-40, February.
  6. S. Rao Aiyagari & Stephen D. Williamson, 1997. "Credit in a Random Matching Model With Private Information," Game Theory and Information, EconWPA 9705005, EconWPA.
  7. Shi, Shouyong, 1996. "Credit and Money in a Search Model with Divisible Commodities," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 63(4), pages 627-52, October.
  8. Klein, Benjamin, 1974. "The Competitive Supply of Money," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 6(4), pages 423-53, November.
  9. Champ, Bruce & Wallace, Neil & Weber, Warren E., 1994. "Interest rates under the U.S. national banking system," Journal of Monetary Economics, Elsevier, Elsevier, vol. 34(3), pages 343-358, December.
  10. Scott Freeman, 1993. "Clearinghouse banks and banknote over-issue," Research Paper, Federal Reserve Bank of Dallas 9326, Federal Reserve Bank of Dallas.
  11. Hanson, John R, II, 1979. "Money in the Colonial American Economy: An Extension," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 17(2), pages 281-86, April.
  12. King, Robert G., 1983. "On the economics of private money," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(1), pages 127-158.
  13. Sargent, Thomas J & Wallace, Neil, 1982. "The Real-Bills Doctrine versus the Quantity Theory: A Reconsideration," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(6), pages 1212-36, December.
  14. Rolnick, Arthur J. & Weber, Warren E., 1984. "The causes of free bank failures : A detailed examination," Journal of Monetary Economics, Elsevier, Elsevier, vol. 14(3), pages 267-291, November.
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