Money, Banking and Financial Markets

50 Pages Posted: 7 Sep 2017 Last revised: 27 Nov 2019

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: 2017-08-03

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 in government money, where the terms of bank deposit contracts are affected 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. Among other things, 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: Federal Reserve Bank of St. Louis, Economic Research, Money, Banks, Financial markets, Lender-of-last-resort, Bank runs

JEL Classification: E44, E52, E58, G21

Suggested Citation

Andolfatto, David and Berentsen, Aleksander and Martin, Fernando M., Money, Banking and Financial Markets (2017-08-03). FRB St. Louis Working Paper No. 2017-23, Available at SSRN: https://ssrn.com/abstract=3029765 or http://dx.doi.org/10.20955/wp.2017.023

David Andolfatto (Contact Author)

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

Aleksander Berentsen

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

Petersplatz 1
Basel, 4001
Switzerland

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

Poschinger Str. 5
Munich, DE-81679
Germany

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)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
49
Abstract Views
305
PlumX Metrics