Product Selection in Financial Intermediation, Optimal Money Growth, and Central Bank Lending
This paper develops a general equilibrium model of 'spatially' competitive financial intermediaries, in an overlapping generations framework of borrowing and lending. The model studies the implications of an endogenously determined menu of intermediary assets and liabilities for some aspects of monetary policy. The optimal money growth rate is negative but bears no relation to the rate of time preference. A novel role is found for central bank lending with differs from the usual lender-of-last-resort rationale. The rationing of central bank loans is optimal, justifying existing central banking practices.
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