Liquidity, money creation and destruction, and the returns to banking

Ricardo Cavalcanti, Andres Erosa and Ted Temzelides

No 394, Working Paper Series from European Central Bank

Abstract: We build on our earlier model of money in which bank liabilities circulate as medium of exchange, and investigate the provision of liquidity for a range of central-bank regulations dealing with the potential of bank failure. In our model, banks issue inside money under fractional reserves, facing the event of excess redemptions. They monitor the float of their money issue and make reserve-management decisions which affect aggregate liquidity conditions. Numerical examples demonstrate bank failure when returns to banking are low. Central-bank interventions, injecting more funds or making interest payments proportional to holdings of reserves, may improve banks' returns and society's welfare, followed by a reduction in bank failure. JEL Classification: E4, E5

Keywords: liquidity; private money creation (search for similar items in EconPapers)
Date: 2004-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp394.pdf (application/pdf)

Related works:
Journal Article: LIQUIDITY, MONEY CREATION AND DESTRUCTION, AND THE RETURNS TO BANKING (2005)
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:ecb:ecbwps:2004394

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().