A Theory of Money and Banking

David Andolfatto () and Ed Nosal
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Ed Nosal: Federal Reserve Bank of Cleveland

Macroeconomics from EconWPA

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.

Keywords: Money; Banking (search for similar items in EconPapers)
JEL-codes: E (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
Date: Written
Note: Type of Document - Tex; prepared on IBM PC; to print on Lexmark Optra E310; pages: 30; figures: included
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Related works:
Working Paper: A theory of money and banking (2003)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpma:0310003

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