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Clearing vs. Leakage: Does Note Monopoly Increase Money and Credit Cycles?

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    Abstract

    The effects of note monopolisation on the amplitude of money and credit cycles are studied. Note monopolisation trades clearing for leakage. If the central bank's reserve ratio is larger than that of the commercial banks, and if the currency-deposit ratio is sufficiently large, the leakage effect could domi-nate the loss-of-clearing effect (base expansion), such that the credit capacity of the banking system decreases. This was the case when the Bank of Sweden gained a note monopoly in 1904. Money and credit cycles should therefore have become smaller. Swedish bank data for 1871–1938 reveal that money cycles became smaller, but credit cycles larger. The latter is attributed to an increasing time-demand deposit ratio, which increases the credit capacity of the banking system.

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    Paper provided by The Ratio Institute in its series Ratio Working Papers with number 67.

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    Length: 25 pages
    Date of creation: 16 Feb 2005
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    Handle: RePEc:hhs:ratioi:0067

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    Keywords: Clearing mechanism; Credit expansion; Currency-deposit ratio; Fiduciary money; Free banking; Leakage; Money multiplier;

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    1. Miron, Jeffrey A, 1986. "Financial Panics, the Seasonality of the Nominal Interest Rate, and theFounding of the Fed," American Economic Review, American Economic Association, vol. 76(1), pages 125-40, March.
    2. Selgin, George, 1994. "Free Banking and Monetary Control," Economic Journal, Royal Economic Society, vol. 104(427), pages 1449-59, November.
    3. Selgin, George, 2001. "In-Concert Overexpansion and the Precautionary Demand for Bank Reserves," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 294-300, May.
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