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Money, banking, and monetary policy

  • He, Ping
  • Huang, Lixin
  • Wright, Randall

An important function of banks is to issue liabilities, like demand deposits, that are relatively safe and liquid. We introduce a risk of theft and a safe-keeping role for banks into modern monetary theory. This provides a general equilibrium framework for analyzing banking in historical and contemporary contexts. The model can generate the concurrent circulation of cash and bank liabilities as media of exchange, or inside and outside money. It also yields novel policy implications. For example, negative nominal interest rates are feasible, and for some parameters optimal; for other parameters, strictly positive nominal rates are optimal.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304-3932(08)00085-8
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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 55 (2008)
Issue (Month): 6 (September)
Pages: 1013-1024

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Handle: RePEc:eee:moneco:v:55:y:2008:i:6:p:1013-1024
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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