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Private Money and Equilibrium Liquidity

Listed author(s):
  • Roberto Robatto

    (University Wisconsin Madison)

  • Pierpaolo Benigno

    (LUISS Guido Carli)

Can creation of private money by financial intermediaries fulfill the liquidity needs of the economy? The answer is no if the market is run only by forces of free competition. Multiple equilibria are possible: equilibria with complete satiation of liquidity and absence of default coexists with ones characterized by shortages and partial default. In this framework, capital requirements, distortions to demand or supply of private money, and the role of public liquidity are investigated.

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File URL: https://economicdynamics.org/meetpapers/2016/paper_690.pdf
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Paper provided by Society for Economic Dynamics in its series 2016 Meeting Papers with number 690.

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Date of creation: 2016
Handle: RePEc:red:sed016:690
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  1. Jeremy C. Stein, 2012. "Monetary Policy as Financial Stability Regulation," The Quarterly Journal of Economics, Oxford University Press, vol. 127(1), pages 57-95.
  2. Ricardo Lagos, 2011. "Asset Prices, Liquidity, and Monetary Policy in an Exchange Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 521-552, October.
  3. Del Negro, Marco & Sims, Christopher A., 2015. "When does a central bank׳s balance sheet require fiscal support?," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 1-19.
  4. Marco Bassetto & Todd Messer, 2013. "Fiscal Consequences of Paying Interest on Reserves," Fiscal Studies, Institute for Fiscal Studies, vol. 34, pages 413-436, December.
  5. Lagos, Ricardo, 2010. "Asset prices and liquidity in an exchange economy," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 913-930, November.
  6. Bruce D. Smith, 2002. "Monetary Policy, Banking Crises, and the Friedman Rule," American Economic Review, American Economic Association, vol. 92(2), pages 128-134, May.
  7. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  8. Thomas J. Sargent, 2011. "Where to Draw Lines: Stability Versus Efficiency," Economica, London School of Economics and Political Science, vol. 78(310), pages 197-214, 04.
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