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How required reserve ratio affects distribution and velocity of money

Author

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  • Xi, Ning
  • Ding, Ning
  • Wang, Yougui

Abstract

In this paper the dependence of wealth distribution and the velocity of money on the required reserve ratio is examined based on a random transfer model of money and computer simulations. A fractional reserve banking system is introduced to the model where money creation can be achieved by bank loans and the monetary aggregate is determined by the monetary base and the required reserve ratio. It is shown that monetary wealth follows asymmetric Laplace distribution and latency time of money follows exponential distribution. The expression of monetary wealth distribution and that of the velocity of money in terms of the required reserve ratio are presented in a good agreement with simulation results.

Suggested Citation

  • Xi, Ning & Ding, Ning & Wang, Yougui, 2005. "How required reserve ratio affects distribution and velocity of money," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 357(3), pages 543-555.
  • Handle: RePEc:eee:phsmap:v:357:y:2005:i:3:p:543-555
    DOI: 10.1016/j.physa.2005.04.014
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    Cited by:

    1. Newby, Michael & Behr, Adam & Feizabadi, Mitra Shojania, 2011. "Investigating the distribution of personal income obtained from the recent U.S. data," Economic Modelling, Elsevier, vol. 28(3), pages 1170-1173, May.
    2. Tomasz Kozubowski & Saralees Nadarajah, 2010. "Multitude of Laplace distributions," Statistical Papers, Springer, vol. 51(1), pages 127-148, January.
    3. Victor M. Yakovenko & J. Barkley Rosser, 2009. "Colloquium: Statistical mechanics of money, wealth, and income," Papers 0905.1518, arXiv.org, revised Dec 2009.

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