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Private Money and Reserve Management in a Random Matching Model

  • Ricardo Cavalcanti

    (University of Miami)

  • Andres Erosa

    (University of Western Ontario)

  • Ted Temzelides

    (University of Iowa)

We 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 we identify as banks, are endowed with the technology to issue notes and to record-keep reserves with a central clearinghouse, which we 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. We 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 EconWPA in its series Macroeconomics with number 9803008.

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Date of creation: 27 Mar 1998
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Handle: RePEc:wpa:wuwpma:9803008
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  1. Bengt Holmstrom & Jean Tirole, 1996. "Private and Public Supply of Liquidity," NBER Working Papers 5817, National Bureau of Economic Research, Inc.
  2. Edward J. Green, 1999. "Money and debt in the structure of payments," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 13-29.
  3. S. Rao Aiyagari & Stephen D. Williamson, 1999. "Credit in a Random Matching Model with Private Information," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 36-64, January.
  4. Sargent, Thomas J & Wallace, Neil, 1982. "The Real-Bills Doctrine versus the Quantity Theory: A Reconsideration," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1212-36, December.
  5. Scott Freeman, 1993. "Clearinghouse banks and banknote over-issue," Research Paper 9326, Federal Reserve Bank of Dallas.
  6. Hanson, John R, II, 1979. "Money in the Colonial American Economy: An Extension," Economic Inquiry, Western Economic Association International, vol. 17(2), pages 281-86, April.
  7. Shi, Shouyong, 1996. "Credit and Money in a Search Model with Divisible Commodities," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 627-52, October.
  8. Klein, Benjamin, 1974. "The Competitive Supply of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(4), pages 423-53, November.
  9. S. Rao Aiyagari & Neil Wallace, 1991. "Existence of steady states with positive consumption in the Kiyotaki-Wright model," Working Papers 428, Federal Reserve Bank of Minneapolis.
  10. Bruce Champ & Neil Wallace & Warren Weber, 1993. "Interest Rates Under the U.S. National Banking System," Economic History 9310001, EconWPA.
  11. Rolnick, Arthur J. & Weber, Warren E., 1984. "The causes of free bank failures : A detailed examination," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 267-291, November.
  12. 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.
  13. King, Robert G., 1983. "On the economics of private money," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 127-158.
  14. Diamond, Peter, 1990. "Pairwise Credit in Search Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 285-319, May.
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