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The Broad Consequences of Narrow Banking

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  • Matheus R Grasselli
  • Alexander Lipton

Abstract

We investigate the macroeconomic consequences of narrow banking in the context of stock-flow consistent models. We begin with an extension of the Goodwin-Keen model incorporating time deposits, government bills, cash, and central bank reserves to the base model with loans and demand deposits and use it to describe a fractional reserve banking system. We then characterize narrow banking by a full reserve requirement on demand deposits and describe the resulting separation between the payment system and lending functions of the resulting banking sector. By way of numerical examples, we explore the properties of fractional and full reserve versions of the model and compare their asymptotic properties. We find that narrow banking does not lead to any loss in economic growth when the models converge to a finite equilibrium, while allowing for more direct monitoring and prevention of financial breakdowns in the case of explosive asymptotic behaviour.

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  • Matheus R Grasselli & Alexander Lipton, 2018. "The Broad Consequences of Narrow Banking," Papers 1810.05689, arXiv.org.
  • Handle: RePEc:arx:papers:1810.05689
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    References listed on IDEAS

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    1. Grasselli, Matheus R. & Nguyen-Huu, Adrien, 2018. "Inventory growth cycles with debt-financed investment," Structural Change and Economic Dynamics, Elsevier, vol. 44(C), pages 1-13.
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    4. 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.
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    6. Barrdear, John & Kumhof, Michael, 2016. "The macroeconomics of central bank issued digital currencies," Bank of England working papers 605, Bank of England.
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