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A Theory of Money and Banking

Author

Listed:
  • David Andolfatto

    (Simon Fraser University)

  • Ed Nosal

    (Federal Reserve Bank of Cleveland)

Abstract

We construct a simple environment that combines a limited communication friction and a limited information friction in order to generate a role for money and intermediation. We ask whether there is any reason to expect the emergence of a banking sector (i.e., institutions that combine the business of money creation with the business of intermediation). In our model the unique equilibrium is characterized, in part, by the existence of an agent that: (1) creates money (a debt instrument that circulates as a means of payment); (2) lends it out (swapping it for less liquid forms of debt); (3) is responsible for monitoring those agents in control of the capital backing the illiquid debt; and (4) collects on money loans as they come due. Furthermore, the bank money in our model is a debt instrument that embeds within it important stipulations that are found in actual private money instruments. Thus, our model goes some way in addressing the questions of why private money takes the form that it does, as well as why private money is typically supplied by banks.

Suggested Citation

  • David Andolfatto & Ed Nosal, 2003. "A Theory of Money and Banking," Macroeconomics 0310003, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpma:0310003
    Note: Type of Document - Tex; prepared on IBM PC; to print on Lexmark Optra E310; pages: 30; figures: included
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    References listed on IDEAS

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    Cited by:

    1. Wen, Yi, 2015. "Money, liquidity and welfare," European Economic Review, Elsevier, vol. 76(C), pages 1-24.
    2. Yi Wen, 2012. "Liquidity and welfare," Working Papers 2012-037, Federal Reserve Bank of St. Louis.
    3. Chiu, Jonathan & Meh, Césaire A., 2011. "Financial Intermediation, Liquidity, And Inflation," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S1), pages 83-118, April.
    4. Diarmid Weir, 2013. "Fiat Money, Individual Rationality and Production," Metroeconomica, Wiley Blackwell, vol. 64(4), pages 573-590, November.
    5. He, Ping & Huang, Lixin & Wright, Randall, 2008. "Money, banking, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1013-1024, September.
    6. COCIUG, Victoria & TIMOFEI, Olga, 2016. "Optimization Of Monetary Creation By Linking Monetary Policies With Commercial Banks' Strategies," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 20(2), pages 79-90.
    7. Sun, Hongfei, 2007. "Aggregate uncertainty, money and banking," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1929-1948, October.
    8. COCIUG, Victoria & TIMOFEI, Olga, 2014. "Monetary Policy Force Effect By Means Of Banks Money Creation," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 18(2), pages 18-28.
    9. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 1-23, January.
    10. Sun, Hongfei, 2007. "Banking, Inside Money and Outside Money," MPRA Paper 4504, University Library of Munich, Germany.
    11. Geoffrey Dunbar, 2005. "International Lending, Capital Controls and Wealth Inequality," 2005 Meeting Papers 492, Society for Economic Dynamics.

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    More about this item

    Keywords

    Money; Banking;

    JEL classification:

    • E - Macroeconomics and Monetary Economics

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