Credit, banking, liquidity shortfall, and monetary policy

Hyung Sun Choi and Manjong Lee

International Review of Economics & Finance, 2016, vol. 46, issue C, 87-99

Abstract: A simple monetary model is constructed to explore dynamic interactions among the choice of means of payment, bank's reserves, a liquidity shortfall, and monetary policy. In the presence of credit-transaction cost shocks, a bank that issues credit can face a liquidity shortfall as its ex-ante reserves fall short of liquidity demand. In equilibrium, credit payments and collections by a bank are balanced with each other and hence bank's ex-post reserve holdings crucially depend on the demand for cash. The likelihood of a liquidity shortfall increases with credit-transaction costs due to larger cash withdrawals. When the government increases money growth, both the demand for cash and the likelihood of a liquidity shortfall increase.

Keywords: Cash; Credit; Banking; Reserves; Monetary policy; Liquidity shortfall (search for similar items in EconPapers)
JEL-codes: E42 E44 E50 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:46:y:2016:i:c:p:87-99

DOI: 10.1016/j.iref.2016.08.006

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