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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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