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Money, banking, and capital formation

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  • Stacey L. Schreft
  • Bruce Smith

Abstract

We consider a monetary growth model in which banks arise to provide liquidity. In addition, there is a government that issues not only money, but interest-bearing bonds; these bonds compete with capital in private portfolios. When the government fixes a constant growth rate for the money stock, we show that there can exist multiple nontrivial monetary steady states. One of these steady states is a saddle, while the other can be a sink. Paths approaching these steady states can display damped endogenous fluctuations, and development trap phenomena are common. Across different steady states, low capital stocks are associated with high nominal interest rates; the latter signal the comparative inefficiency of the financial system. Also, increases in the steady state inflation rate can easily reduce the steady state capital stock.

Suggested Citation

  • Stacey L. Schreft & Bruce Smith, 1994. "Money, banking, and capital formation," Working Paper 94-05, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:94-05
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    References listed on IDEAS

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