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Banking in the Lagos-Wright Monetary Economy

  • KOBAYASHI Keiichiro
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    We introduce banks in a monetary economy and analyze the effect of monetary friction on the banking sector. The basic model is a cash-in-advance economy which is a simplified version of Lagos and Wright's (2005) model. We introduce the banks using Diamond and Rajan (2001) in this economy: Bankers can produce goods more efficiently than depositors but cannot pre-commit to the use of human capital on behalf of the latter. Demand deposit contracts work as a commitment device for bankers, while leaving banks susceptible to bank runs. We show that as the inflation rate increases, the size of the banking sector expands, and the probability of bank runs occurring rises.

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    File URL: http://www.rieti.go.jp/jp/publications/dp/12e054.pdf
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    Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 12054.

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    Length: 24 pages
    Date of creation: Sep 2012
    Date of revision:
    Handle: RePEc:eti:dpaper:12054
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    1. Aleksander Berentsen & Gabriele Camera, 2004. "Money, Credit, and Banking," 2004 Meeting Papers 473, Society for Economic Dynamics.
    2. Beatrix Paal & Bruce D. Smith, 2013. "The sub-optimality of the Friedman rule and the optimum quantity of money," Annals of Economics and Finance, Society for AEF, vol. 14(2), pages 911-948, November.
    3. Russell Cooper & Joao Ejarque, 1995. "Financial Intermediation and The Great Depression: A Multiple Equilibrium Interpretation," NBER Working Papers 5130, National Bureau of Economic Research, Inc.
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