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Money, banking and financial markets

Author

Listed:
  • David Andolfatto
  • Aleksander Berentsen
  • Fernando M. Martin

Abstract

The fact that money, banking, and financial markets interact in important ways seems self-evident. The theoretical nature of this interaction, however, has not been fully explored. To this end, we integrate the Diamond (1997) model of banking and financial markets with the Lagos and Wright (2005) dynamic model of monetary exchange – a union that bears a framework in which fractional reserve banks emerge in equilibrium, where bank assets are funded with liabilities made demandable for government money, where the terms of bank deposit contracts are constrained by the liquidity insurance available in financial markets, where banks are subject to runs, and where a central bank has a meaningful role to play, both in terms of inflation policy and as a lender of last resort. The model provides a rationale for nominal deposit contracts combined with a central bank lender-of-last-resort facility to promote efficient liquidity insurance and a panic-free banking system.

Suggested Citation

  • David Andolfatto & Aleksander Berentsen & Fernando M. Martin, 2017. "Money, banking and financial markets," ECON - Working Papers 259, Department of Economics - University of Zurich.
  • Handle: RePEc:zur:econwp:259
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    References listed on IDEAS

    as
    1. Antinolfi, Gaetano & Huybens, Elisabeth & Keister, Todd, 2001. "Monetary Stability and Liquidity Crises: The Role of the Lender of Last Resort," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 187-219, July.
    2. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    3. Berentsen, Aleksander & Camera, Gabriele & Waller, Christopher, 2007. "Money, credit and banking," Journal of Economic Theory, Elsevier, vol. 135(1), pages 171-195, July.
    4. Andolfatto, David, 2013. "Incentive-feasible deflation," Journal of Monetary Economics, Elsevier, vol. 60(4), pages 383-390.
    5. Berentsen, Aleksander & Camera, Gabriele & Waller, Christopher, 2007. "Money, credit and banking," Journal of Economic Theory, Elsevier, vol. 135(1), pages 171-195, July.
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    Citations

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    Cited by:

    1. Roberto Robatto, 2019. "Systemic Banking Panics, Liquidity Risk, and Monetary Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 20-42, October.
    2. Makoto (M.) Watanabe & Tarishi Matsuoka, 2019. "Banking Panics and the Lender of Last Resort in a Monetary Economy," Tinbergen Institute Discussion Papers 19-002/V, Tinbergen Institute.
    3. Chao Gu & Cyril Monnet & Ed Nosal & Randall Wright, 2019. "On the Instability of Banking and Other Financial Intermediation," Working Papers 19.04, Swiss National Bank, Study Center Gerzensee.
    4. van Buggenum, Hugo & Uras, Burak, 2019. "Money, Asset Markets and Efficiency of Capital Formation," Other publications TiSEM 7db639bc-8d7d-4a3c-8034-a, Tilburg University, School of Economics and Management.
    5. Tarishi Matsuoka & Makoto Watanabe, 2017. "Banking Panics and Liquidity in a Monetary Economy," CESifo Working Paper Series 6722, CESifo.
    6. Matsuoka, Tarishi, 2018. "Banks and liquidity crises in emerging market economies," Journal of Economic Dynamics and Control, Elsevier, vol. 94(C), pages 43-62.
    7. Daniel Sanches, 2018. "Banking Panics and Output Dynamics," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 148-171, July.
    8. David Andolfatto, 2018. "Assessing the Impact of Central Bank Digital Currency on Private Banks," Working Papers 2018-026, Federal Reserve Bank of St. Louis, revised 22 Apr 2020.

    More about this item

    Keywords

    Money; banking; financial markets; monetary policy;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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