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Credit, banking, liquidity shortfall, and monetary policy

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  • Choi, Hyung Sun
  • Lee, Manjong

Abstract

A simple monetary model is constructed to explore dynamic interactions among the choice of means of payment, bank's reserves, a liquidity shortfall, and monetary policy. In the presence of credit-transaction cost shocks, a bank that issues credit can face a liquidity shortfall as its ex-ante reserves fall short of liquidity demand. In equilibrium, credit payments and collections by a bank are balanced with each other and hence bank's ex-post reserve holdings crucially depend on the demand for cash. The likelihood of a liquidity shortfall increases with credit-transaction costs due to larger cash withdrawals. When the government increases money growth, both the demand for cash and the likelihood of a liquidity shortfall increase.

Suggested Citation

  • Choi, Hyung Sun & Lee, Manjong, 2016. "Credit, banking, liquidity shortfall, and monetary policy," International Review of Economics & Finance, Elsevier, vol. 46(C), pages 87-99.
    • Handle: RePEc:eee:reveco:v:46:y:2016:i:c:p:87-99
    DOI: 10.1016/j.iref.2016.08.006
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    References listed on IDEAS

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    Cited by:

    1. Choi, Hyung Sun, 2019. "Money, debit card, gross-settlement risk, and central banking," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    2. Chen, Naiwei & Huang, Hsiu-Hsi & Lin, Chia-He, 2018. "Equator principles and bank liquidity," International Review of Economics & Finance, Elsevier, vol. 55(C), pages 185-202.
    3. Yi, Xingjian & Liu, Sheng & Wu, Zhouheng, 2022. "What drives credit expansion worldwide?——An empirical investigation with long-term cross-country panel data," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 225-242.

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    More about this item

    Keywords

    Cash; Credit; Banking; Reserves; Monetary policy; Liquidity shortfall;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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