Banking in a Matching Model of Money and Capital

43 Pages Posted: 23 Dec 2014

See all articles by Valerie Bencivenga

Valerie Bencivenga

University of Texas

Gabriele Camera

Chapman University - Economic Science Institute; University of Bologna - Dept. of Economics

Date Written: December 22, 2014

Abstract

We introduce banks in a model of money and capital with trading frictions. Banks offer demand deposit contracts and hold primary assets to maximize depositors’ utility. If banks’ operating costs are small, banks reallocate liquidity eliminating idle balances and improving the allocation. At moderate costs, idle balances are reduced but not eliminated. At larger costs, banks are redundant. A central bank policy of paying interest on bank reserves can reverse inflation’s distortionary effects, and increase welfare, but only when costs are small. The threshold levels of banks’ costs increase with inflation, suggesting inflation and banks’ utilization are positively associated.

Keywords: Money, Credit; Banking, Monetary Policy

JEL Classification: E41, E50

Suggested Citation

Bencivenga, Valerie and Camera, Gabriele, Banking in a Matching Model of Money and Capital (December 22, 2014). Available at SSRN: https://ssrn.com/abstract=2541947 or http://dx.doi.org/10.2139/ssrn.2541947

Valerie Bencivenga

University of Texas ( email )

Austin, TX 78712
United States
512-475-8509 (Phone)
512-471-3510 (Fax)

Gabriele Camera (Contact Author)

Chapman University - Economic Science Institute ( email )

Orange, CA 92866
United States

HOME PAGE: http://www1.chapman.edu/~camera/

University of Bologna - Dept. of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy

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