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Money with Bank Networks

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  • Cavalcanti, Ricardo de Oliveira
  • Forno, Henrique Dezemone

Abstract

We allow banks to choose between two networks in a simple version of the Cavalcanti and Wallace (1999) model of inside money. Members of a network have access to credit but must redeem banknotes issued by other members in random meetings. We find equilibria in which members of a particular network issue more valuable notes, but face the same ex-ante payoff as that of their competition . Banks are shown to be concerned with both credit externalities and with monetary liabilities. When the size of the bank sector is small, these two opposing forces may result in a stable equilibrium.

Suggested Citation

  • Cavalcanti, Ricardo de Oliveira & Forno, Henrique Dezemone, 2004. "Money with Bank Networks," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 545, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  • Handle: RePEc:fgv:epgewp:545
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    References listed on IDEAS

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    1. Ricardo de O. Cavalcanti & Andres Erosa & Ted Temzelides, 1999. "Private Money and Reserve Management in a Random-Matching Model," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 929-945, October.
    2. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "Inside and outside money as alternative media of exchange," Proceedings, Federal Reserve Bank of Cleveland, pages 443-468.
    3. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
    4. Mills, David C., 2007. "A Model In Which Outside And Inside Money Are Essential," Macroeconomic Dynamics, Cambridge University Press, vol. 11(03), pages 347-366, June.
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    Cited by:

    1. Ricardo de O. Cavalcanti & Andrés Erosa & Ted Temzelides, 2005. "Liquidity, Money Creation And Destruction, And The Returns To Banking," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 675-706, May.
    2. Moreira, Humberto Ataíde & Araújo, Aloísio Pessoa de & Castro Filho, Luciano I. de, 2004. "Pure strategy equilibria of multidimensional and non-monotonic auctions," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 571, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    3. Xiao, Zhijie & Lima, Luiz Renato Regis de Oliveira, 2004. "Purchasing power parity and the unit root tests: a robust analysis," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 552, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).

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