A Theory of Money and Banking

33 Pages Posted: 29 Jul 2010

See all articles by David Andolfatto

David Andolfatto

Simon Fraser University (SFU) - Department of Economics; Federal Reserve Bank of St. Louis

Ed Nosal

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Date Written: October 2003

Abstract

The authors construct a simple environment that combines a limited communication friction and a limited information friction in order to generate a role for money and intermediation. The authors ask whether there is any reason to expect the emergence of a banking sector (i.e., institutions that combine the business of money creation with the business of intermediation). In their model, the unique equilibrium is characterized, in part, by the existence of an agent that: (1) creates money (a debt instrument that circulates as a means of payment); (2) lends it out (swapping it for less liquid forms of debt); (3) is responsible for monitoring those agents in control of the capital backing the illiquid debt; and (4) collects on money loans as they come due. Furthermore, the bank money in their model is a debt instrument that embeds within it important stipulations that are found in actual private money instruments. Thus, the model goes some way in addressing the questions of why private money takes the form that it does, as well as why private money is typically supplied by banks.

Keywords: money, banking, limited communication, limited information

JEL Classification: E40, G21, D82

Suggested Citation

Andolfatto, David and Nosal, Ed, A Theory of Money and Banking (October 2003). FRB of Cleveland Working Paper No. 03-10. Available at SSRN: https://ssrn.com/abstract=1026281 or http://dx.doi.org/10.2139/ssrn.1026281

David Andolfatto

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada
604 291-5825 (Phone)
604 291-5944 (Fax)

Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Ed Nosal (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

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