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Money with Bank Networks

  • Cavalcanti, Ricardo de Oliveira
  • Forno, Henrique Dezemone

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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File URL: http://bibliotecadigital.fgv.br/dspace/bitstream/10438/808/1/Money+with+bank+networks.pdf
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Paper provided by FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil) in its series Economics Working Papers (Ensaios Economicos da EPGE) with number 545.

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Date of creation: 01 Jun 2004
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Handle: RePEc:fgv:epgewp:545
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  1. 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.
  2. 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.
  3. 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.).
  4. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
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