MONEY AND BANKING IN SEARCH EQUILIBRIUM

Ping He, Lixin Huang () and Randall Wright

International Economic Review, 2005, vol. 46, issue 2, 637-670

Abstract: We develop a new theory of money and banking based on the old story in which goldsmiths start accepting deposits for safe keeping, then their liabilities begin circulating as media of exchange, then they begin making loans. We first discuss the history. We then present a model where agents can open bank accounts and write checks. The equilibrium means of payment may be cash, checks, or both. Sometimes multiple equilibria exist. Introducing banks increases the set of parameters for which money is valued-thus, money and banking are complements. We also derive a microfounded version of the usual money multiplier. Copyright 2005 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Date: 2005
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