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Liquidity Regulation in a Monetary Economy

Juan Aquino ()

No 2020-013, Working Papers from Banco Central de Reserva del Perú

Abstract: A market failure that justifies liquidity regulation lies on the incompleteness of financial markets when there is risk about the aggregate distribution of transaction types. I develop a framework in which outside (fiat, government-provided) and inside (plastic, bank-created) money co-exist as means of payment under either complete or incomplete financial markets for aggregate risk. The welfare analysis is reduced to comparing only two parameters: the currency-to-liability ratio δ which is set by the government and the fraction ρ of banks’ depositors engaged in cash-only transactions (inside money cannot be accepted). In equilibrium, when δ

Keywords: Capital banks; financial markets; endogenous liquidity; regulation; monetary policy. (search for similar items in EconPapers)
JEL-codes: E44 E52 G21 (search for similar items in EconPapers)
Date: 2020-12
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