Liquidity, Money Creation and Destruction, and the Returns to Banking

97 Pages Posted: 13 Dec 2004

See all articles by Ricardo de O. Cavalcanti

Ricardo de O. Cavalcanti

Pennsylvania State University, College of the Liberal Arts - Department of Economic

Andres Erosa

University of Toronto - Department of Economics

Ted P. Loch-Temzelides

Rice University

Multiple version iconThere are 2 versions of this paper

Date Written: September 2004

Abstract

We build on our earlier model of money in which bank liabilities circulate as medium of exchange, and investigate the provision of liquidity for a range of central-bank regulations dealing with the potential of bank failure. In our model, banks issue inside money under fractional reserves, facing the event of excess redemptions. They monitor the float of their money issue and make reserve-management decisions which affect aggregate liquidity conditions. Numerical examples demonstrate bank failure when returns to banking are low. Central-bank interventions, injecting more funds or making interest payments proportional to holdings of reserves, may improve banks' returns and society's welfare, followed by a reduction in bank failure.

Keywords: private money creation, liquidity

JEL Classification: E4, E5

Suggested Citation

Cavalcanti, Ricardo de O. and Erosa, Andres and Loch-Temzelides, Ted P., Liquidity, Money Creation and Destruction, and the Returns to Banking (September 2004). Available at SSRN: https://ssrn.com/abstract=587261

Ricardo de O. Cavalcanti

Pennsylvania State University, College of the Liberal Arts - Department of Economic ( email )

524 Kern Graduate Building
University Park, PA 16802-3306
United States
814-863-7416 (Phone)
814-863-4775 (Fax)

Andres Erosa

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada

Ted P. Loch-Temzelides (Contact Author)

Rice University ( email )

99 Sunset Blvd
Houston, TX Texas 77005
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
216
Abstract Views
1,692
rank
167,314
PlumX Metrics