Money with Bank Networks
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.
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- 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.
- Cavalcanti, Ricardo & Erosa, Andres & Temzelides, Ted, "undated". "Private Money and Reserve Management in a Random Matching Model," Working Papers 97-17, University of Iowa, Department of Economics, revised Sep 1997.
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- 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.
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- David C. Mills, 2006. "A model in which outside and inside money are essential," Finance and Economics Discussion Series 2006-38, Board of Governors of the Federal Reserve System (U.S.).