Journal Article

A simple model of money and banking


Abstract: This article presents a simple environment that has banks creating and lending out money. The authors define money to be any object that circulates widely as a means of payment and a bank to be an agency that simultaneously issues money and monitors investments. While their framework allows private nonbank liabilities to serve as the economy's medium of exchange, they demonstrate that the cost-minimizing structure has a bank creating liquid funds. In practice, the vast bulk of the money supply consists of private debt instruments that are issued by banks. Thus, their model goes some way in addressing the questions of why private money takes the form it does, and why private money is typically supplied by banks.

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Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Economic Review

Publication Date: 2001

Issue: Q III

Pages: 20-28