Money, Credit, and Banking

Aleksander Berentsen () and Gabriele Camera ()

No 473, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: We use a modified version of the Lagos-Wright model to introduce an essential role for banks. Due to preference shocks, agents have excess demand for or supply of money balances. Banks arise to reallocate excess cash by taking deposits from sellers and making loans to buyers. We consider two variations of the model: one in which buyers borrow to finance consumption and another in which they borrow to finance investment. We show that for any positive nominal interest rate, the existence of banks leads to a higher level of steady state output and welfare. We also derive conditions under which borrowers voluntarily repay loans. Finally, we examine how monetary injections into the banking system affect the economy. The effects are very similar to limited particiption models and gives rise to a liquidity effect on nominal interest rates

Keywords: Money; Credit; Banking (search for similar items in EconPapers)
JEL-codes: E00 E50 D83 (search for similar items in EconPapers)
Date: 2004
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Working Paper: Money, Credit and Banking
Working Paper: Money, Credit and Banking (2005)
Journal Article: Money, credit and banking (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:red:sed004:473

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