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Banking: A New Monetarist Approach

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  • Chao Gu
  • Fabrizio Mattesini
  • Randall Wright

Abstract

We develop a model where: (i) banks take deposits and make investments; (ii) their liabilities facilitate third-party transactions. Other models have (i) or (ii), not both, although we argue they are intimately connected: we show that they both emerge from limited commitment. We describe an environment, characterize desirable allocations, and interpret the outcomes as banking arrangements. Banks are essential: without them, the set of feasible allocations is inferior. As a technical contribution, we characterize dynamically optimal credit allocations with frictions, show they involve backloading, and analyse how this interacts with banking. We also confront the theory with economic history. Copyright 2013, Oxford University Press.

Suggested Citation

  • Chao Gu & Fabrizio Mattesini & Randall Wright, 2013. "Banking: A New Monetarist Approach," Review of Economic Studies, Oxford University Press, vol. 80(2), pages 636-662.
  • Handle: RePEc:oup:restud:v:80:y:2013:i:2:p:636-662
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    File URL: http://hdl.handle.net/10.1093/restud/rds037
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    Cited by:

    1. Berentsen, Aleksander & Huber, Samuel & Marchesiani, Alessandro, 2016. "The societal benefit of a financial transaction tax," European Economic Review, Elsevier, vol. 89(C), pages 303-323.
    2. Sanches, Daniel R., 2014. "Banking panics and protracted recessions," Working Papers 14-37, Federal Reserve Bank of Philadelphia.
    3. Zachary Bethune & Tai-Wei Hu & Guillaume Rocheteau, 2018. "Optimal Credit Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 27, pages 231-245, January.
    4. Chari, V.V. & Phelan, Christopher, 2014. "On the social usefulness of fractional reserve banking," Journal of Monetary Economics, Elsevier, vol. 65(C), pages 1-13.
    5. Daniel Sanches, 2016. "On the Inherent Instability of Private Money," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 198-214, April.
    6. Giorgia Piacentino & Anjan Thakor & Jason Donaldson, 2016. "Warehouse Banking," 2016 Meeting Papers 588, Society for Economic Dynamics.
    7. Donaldson, Jason & Micheler, Eva, 2016. "Resaleable debt and systemic risk," LSE Research Online Documents on Economics 66042, London School of Economics and Political Science, LSE Library.
    8. Kiyotaki, Nobuhiro & Lagos, Ricardo & Wright, Randall, 2016. "Introduction to the symposium issue on money and liquidity," Journal of Economic Theory, Elsevier, vol. 164(C), pages 1-9.
    9. Ferraris, Leo & Mattesini, Fabrizio, 2014. "Limited commitment and the legal restrictions theory of the demand for money," Journal of Economic Theory, Elsevier, vol. 151(C), pages 196-215.
    10. Guillaume Plantin, 2015. "Shadow Banking and Bank Capital Regulation," Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 146-175.
    11. Jonathan Chiu & Mei Dong & Enchuan Shao, 2012. "On the Welfare Effects of Credit Arrangements," Staff Working Papers 12-43, Bank of Canada.
    12. Guillaume Plantin, 2015. "Shadow Banking and Bank Capital Regulation," Post-Print hal-01168494, HAL.
    13. Fabien Tripier, 2014. "A Search-Theoretic Approach to Efficient Financial Intermediation," Working Papers 2014-18, CEPII research center.
    14. Sanches, Daniel, 2013. "On the welfare properties of fractional reserve banking," Working Papers 13-32, Federal Reserve Bank of Philadelphia, revised 04 Feb 2013.
    15. Stella Xiuhua Huangfu & Hongfei Sun & Chenggang Zhou & Mei Dong, 2017. "A Macroeconomic Theory of Banking Oligopoly," 2017 Meeting Papers 191, Society for Economic Dynamics.
    16. Meradj Mortezapouraghdam, 2016. "Three Essays on the Role of Frictions in the Economy," Sciences Po publications info:hdl:2441/293qice3lj8, Sciences Po.
    17. repec:eee:jfinec:v:127:y:2018:i:3:p:485-504 is not listed on IDEAS
    18. Daniel Sanches, 2018. "Banking Panics and Output Dynamics," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 148-171, July.
    19. Daniel Sanches, 2016. "On The Welfare Properties Of Fractional Reserve Banking," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57, pages 935-954, August.
    20. Christine Parlour, 2017. "Making Money: Commercial Banks, Liquidity Transformation and the Payment System," 2017 Meeting Papers 388, Society for Economic Dynamics.

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