We construct a simple environment that combines a limited communication friction and a limited information friction in order to generate a role for money and intermediation. We ask whether there is any reason to expect the emergence of a banking sector (i.e., institutions that combine the business of money creation with the business of intermediation). In our model the unique equilibrium is characterized, in part, by the existence of an agent that: (1) creates money (a debt instrument that circulates as a means of payment); (2) lends it out (swapping it for less liquid forms of debt); (3) is responsible for monitoring those agents in control of the capital backing the illiquid debt; and (4) collects on money loans as they come due. Furthermore, the bank money in our model is a debt instrument that embeds within it important stipulations that are found in actual private money instruments. Thus, our model goes some way in addressing the questions of why private money takes the form that it does, as well as why private money is typically supplied by banks.
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Paper provided by EconWPA in its series Macroeconomics with number
0310003.
Length: 30 pages Date of creation: 06 Oct 2003 Date of revision: Handle: RePEc:wpa:wuwpma:0310003
Note: Type of Document - Tex; prepared on IBM PC; to print on Lexmark Optra E310; pages: 30; figures: included Contact details of provider: Web page: http://129.3.20.41
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References listed on IDEAS 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.:
Ping He & Lixin Huang & Randall Wright, 2005.
"Money And Banking In Search Equilibrium,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 637-670, 05.
[Downloadable!] (restricted)
James Peck & Karl Shell, 2003.
"Equilibrium Bank Runs,"
Journal of Political Economy,
University of Chicago Press, vol. 111(1), pages 103-123, February.
[Downloadable!] (restricted)
Other versions:
Peck, James & Shell, Karl, 2001.
"Equilibrium Bank Runs,"
Working Papers
01-10r, Cornell University, Center for Analytic Economics.
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Cited by: (explanations, 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.)