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Modern Monetary Circuit Theory, Stability Of Interconnected Banking Network, And Balance Sheet Optimization For Individual Banks

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  • ALEXANDER LIPTON

    () (Connection Science Fellow, MIT Connection Science, Media Lab, Massachusetts Institute of Technology, 77, Massachusetts Avenue, Cambridge, MA 02139, USA)

Abstract

A modern version of monetary circuit theory with a particular emphasis on stochastic underpinning mechanisms is developed. It is explained how money is created by the banking system as a whole and by individual banks. The role of central banks as system stabilizers and liquidity providers is elucidated. It is shown how in the process of money creation banks become naturally interconnected. A novel extended structural default model describing the stability of the Interconnected banking network is proposed. The purpose of bank capital and liquidity is explained. Multi-period constrained optimization problem for bank balance sheet is formulated and solved in a simple case. Both theoretical and practical aspects are covered.

Suggested Citation

  • Alexander Lipton, 2016. "Modern Monetary Circuit Theory, Stability Of Interconnected Banking Network, And Balance Sheet Optimization For Individual Banks," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 19(06), pages 1-57, September.
  • Handle: RePEc:wsi:ijtafx:v:19:y:2016:i:06:n:s0219024916500345
    DOI: 10.1142/S0219024916500345
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    Cited by:

    1. Vadim Kaushansky & Alexander Lipton & Christoph Reisinger, 2017. "Transition probability of Brownian motion in the octant and its application to default modeling," Papers 1801.00362, arXiv.org, revised May 2018.

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