Inside Money as a Source of Investment Finance
Households demand bank deposits for the liquidity services such assets provide. Higher yielding assets usually are available to finance future consumption. Nevertheless, the demand for bank liabilities enables banks to finance investment. One might therefore expect more capital in an economy utilizing banks. The author shows that, when low wealth households cannot borrow, bank lending increases the capital stock and reduces equilibrium interest rates, while making the real equilibrium more sensitive to shifts in the demand for inside money. When households can borrow, however, bank lending is absorbed by low wealth households and banks have few effects on the real equilibrium.
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Volume (Year): 30 (1998)
Issue (Month): 2 (May)
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