Monetary Policy and Bank Regulations in an Economy with Financial Innovations
This is a study of financial innovations and moves towards "the cashless society" in a general equilibrium, cash-in-advance model. It is assumed that a subset of goods--cash goods and check goods--can be purchased only with tangible means of payment, i.e. cash and checks drawn on interest-bearing bank accounts. Financial innovations are modelled as a decrease in the fraction of such goods. In this world monetary policy and bank regulations have welfare effects. A main result is that Friedman's (1969) optimum quantity of money rule continues to hold in this setting. It does so because a nonzero interest rate distorts the composition of consumption. This general result is translated into results on the optimum rate of expansion of the supply of base money under different assumptions. I also consider optimum reserve requirements on banks. Copyright 1989 by The London School of Economics and Political Science.
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Volume (Year): 56 (1989)
Issue (Month): 224 (November)
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