Banks, private money, and government regulation |
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Authors: | Yiting Li |
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Affiliation: | Department of Economics, National Taiwan University, 21 Hsu-Chow Road, Taipei 10020, Taiwan |
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Abstract: | We study competition between inside and outside money in economies with trading frictions and financial intermediation. Claims on banks circulate if the redemption rate is low. When the quantity of fiat money is scarce, coexistence of inside and outside money dominates equilibria with a unique medium of exchange. If outside money is ample, banks choose to redeem claims in outside money, which increases welfare. Under binding reserve requirements, tightening monetary policy leads to credit rationing. Our results support recent trends toward lower reserve requirements. However, we also identify situations where restrictions on note issue are beneficial. |
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Keywords: | E40 E43 E50 E52 |
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