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Monetary Policy and Bank Regulations in an Economy with Financial Innovations

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  • Englund, Peter

Abstract

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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  • Englund, Peter, 1989. "Monetary Policy and Bank Regulations in an Economy with Financial Innovations," Economica, London School of Economics and Political Science, vol. 56(224), pages 459-472, November.
  • Handle: RePEc:bla:econom:v:56:y:1989:i:224:p:459-72
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    Cited by:

    1. Arrau, Patricio & de Gregorio, Jose, 1991. "Financial innovation and money demand : theory and empirical implementation," Policy Research Working Paper Series 585, The World Bank.
    2. Chamley, Christophe & Honohan, Patrick, 1990. "Taxation of financial intermediation : measurement principles and application to five African countries," Policy Research Working Paper Series 421, The World Bank.

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