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How Required Reserve Ratio Affects Distribution and Velocity of Money

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  • Ning Xi
  • Ning Ding
  • Yougui Wang

Abstract

In this paper the dependence of wealth distribution and the velocity of money on the required reserve ratio is examined based on a random transfer model of money and computer simulations. A fractional reserve banking system is introduced to the model where money creation can be achieved by bank loans and the monetary aggregate is determined by the monetary base and the required reserve ratio. It is shown that monetary wealth follows asymmetric Laplace distribution and latency time of money follows exponential distribution. The expression of monetary wealth distribution and that of the velocity of money in terms of the required reserve ratio are presented in a good agreement with simulation results.

Suggested Citation

  • Ning Xi & Ning Ding & Yougui Wang, 2005. "How Required Reserve Ratio Affects Distribution and Velocity of Money," Papers physics/0507160, arXiv.org.
  • Handle: RePEc:arx:papers:physics/0507160
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    File URL: http://arxiv.org/pdf/physics/0507160
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    Cited by:

    1. Tomasz Kozubowski & Saralees Nadarajah, 2010. "Multitude of Laplace distributions," Statistical Papers, Springer, vol. 51(1), pages 127-148, January.
    2. Victor M. Yakovenko, 2007. "Econophysics, Statistical Mechanics Approach to," Papers 0709.3662, arXiv.org, revised Aug 2008.
    3. Victor M. Yakovenko, 2012. "Applications of statistical mechanics to economics: Entropic origin of the probability distributions of money, income, and energy consumption," Papers 1204.6483, arXiv.org.
    4. Victor M. Yakovenko & J. Barkley Rosser, 2009. "Colloquium: Statistical mechanics of money, wealth, and income," Papers 0905.1518, arXiv.org, revised Dec 2009.

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