Stock market booms, endogenous credit creation and the implications of broad and narrow banking for macroeconomic stability

Carl Chiarella, Peter Flaschel, Florian Hartmann and Christian Proaño

Journal of Economic Behavior & Organization, 2012, vol. 83, issue 3, 410-423

Abstract: In this paper we study the implications of the present broad banking system for macroeconomic stability. We show that when commercial banks are allowed to trade in financial assets (here equities) as a substitute for traditional lending, the macroeconomic system is likely to be an unstable one. We then consider a narrow banking system defined by a Fisherian 100 percent reserve ratio for checkable deposits and the ban for commercial banks from trading in stocks and other financial assets. Within the stylized theoretical framework set up here, we show that in the second system macroeconomic stability is guaranteed by some weak assumptions on the behavior of economic agents. Moreover, while a sufficient loan supply can be guaranteed in such a framework, the rationale for bank runs can be eliminated, in contrast to what is likely to happen under traditional broad banking. Though narrow banking is an extreme banking system unlikely to be adopted in the short-run, its features highlight the stability and efficiency properties that the separation between commercial and investment banking bring about.

Keywords: Financial markets; Credit creation; Broad and narrow banking; Macroeconomic instability (search for similar items in EconPapers)
JEL-codes: E12 E24 E31 E52 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167268112000558
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Stock market booms, endogenous credit creation and the implications of broad and narrow banking for macroeconomic stability (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:83:y:2012:i:3:p:410-423

DOI: 10.1016/j.jebo.2012.03.004

Access Statistics for this article

Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

More articles in Journal of Economic Behavior & Organization from Elsevier
Bibliographic data for series maintained by Catherine Liu ().