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Private money and reserve management in a random matching model

  • Ricardo Cavalcanti
  • Andres Erosa
  • Ted Temzelides

The authors introduce an element of centralization in a random matching model of money that allows for private liabilities to circulate as media of exchange. Some agents, which the authors identify as banks, are endowed with the technology to issue notes and to record-keep reserves with a central clearinghouse, which they call the treasury. The liabilities are redeemed according to a stochastic process that depends on the endogenous trades. The treasury removes the banking technology from banks that are not able to meet the redemptions in a given period. This, together with the market incompleteness, gives rise to a reserve management problem for the issuing banks. The authors demonstrate that "sufficiently patient" banks will concentrate on improving their reserve position instead of pursuing additional issue. The model provides a first attempt to reconcile limited note issue with optimizing behavior by banks during the National Banking Era.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 97-24.

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Date of creation: 1997
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Handle: RePEc:fip:fedpwp:97-24
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  1. Edward J. Green, 1996. "Money and Debt in the Structure of Payments," Macroeconomics 9609002, EconWPA, revised 09 Sep 1996.
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