Money, Banking and Financial Markets

University of Zurich, Department of Economics, Working Paper No. 259

35 Pages Posted: 17 Aug 2017

See all articles by David Andolfatto

David Andolfatto

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

Aleksander Berentsen

University of Basel - Faculty of Business and Economics; CESifo (Center for Economic Studies and Ifo Institute)

Fernando M. Martin

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Multiple version iconThere are 2 versions of this paper

Date Written: August 03, 2017

Abstract

The fact that money, banking, and financial markets interact in important ways seems self-evident. The theoretical nature of this interaction, however, has not been fully explored. To this end, we integrate the Diamond (1997) model of banking and financial markets with the Lagos and Wright (2005) dynamic model of monetary exchange – a union that bears a framework in which fractional reserve banks emerge in equilibrium, where bank assets are funded with liabilities made demandable for government money, where the terms of bank deposit contracts are constrained by the liquidity insurance available in financial markets, where banks are subject to runs, and where a central bank has a meaningful role to play, both in terms of inflation policy and as a lender of last resort. The model provides a rationale for nominal deposit contracts combined with a central bank lender-of-last-resort facility to promote efficient liquidity insurance and a panic-free banking system.

Keywords: Money, Banking, Financial Markets, Monetary Policy

JEL Classification: E50, E60, D53, D02, G21

Suggested Citation

Andolfatto, David and Berentsen, Aleksander and Martin, Fernando M., Money, Banking and Financial Markets (August 03, 2017). University of Zurich, Department of Economics, Working Paper No. 259, Available at SSRN: https://ssrn.com/abstract=3019257 or http://dx.doi.org/10.2139/ssrn.3019257

David Andolfatto (Contact Author)

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

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Aleksander Berentsen

University of Basel - Faculty of Business and Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Fernando M. Martin

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-7350 (Phone)

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