Private Money and Equilibrium Liquidity

Roberto Robatto and Pierpaolo Benigno
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Roberto Robatto: University Wisconsin Madison

No 690, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: Can creation of private money by financial intermediaries fulfill the liquidity needs of the economy? The answer is no if the market is run only by forces of free competition. Multiple equilibria are possible: equilibria with complete satiation of liquidity and absence of default coexists with ones characterized by shortages and partial default. In this framework, capital requirements, distortions to demand or supply of private money, and the role of public liquidity are investigated.

Date: 2016
New Economics Papers: this item is included in nep-dge and nep-mon
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