Working Paper

A theory of money and banking

Abstract: The authors construct a simple environment that combines a limited communication friction and a limited information friction in order to generate a role for money and intermediation. They ask whether there is any reason to expect the emergence of a banking sector (i.e., institutions that combine the business of money creation with the business of intermediation). In their model, the unique equilibrium is characterized partly by the existence of an agent that: (1) creates money (a debt instrument that circulates as a means of payment); (2) lends it out (swapping it for less liquid forms of debt); (3) is responsible for monitoring those agents in control of the capital backing the illiquid debt; and (4) collects on money loans as they come due.

Keywords: Money; Banks and banking; Information theory;

https://doi.org/10.26509/frbc-wp-200310

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers (Old Series)

Publication Date: 2003

Number: 0310