How Required Reserve Ratio Affects Distribution and Velocity of Money

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Xi, Ning ; Ding, Ning ; Wang, Yougui (2005)
  • Related identifiers: doi: 10.1016/j.physa.2005.04.014
  • Subject: Physics - Physics and Society | Condensed Matter - Statistical Mechanics | Quantitative Finance - General Finance
    arxiv: Computer Science::Computers and Society | Computer Science::Computer Science and Game Theory

In this paper the dependence of wealth distribution and the velocity of money on the required reserve ratio is examined based on a random transfer model of money and computer simulations. A fractional reserve banking system is introduced to the model where money creation can be achieved by bank loans and the monetary aggregate is determined by the monetary base and the required reserve ratio. It is shown that monetary wealth follows asymmetric Laplace distribution and latency time of money follows exponential distribution. The expression of monetary wealth distribution and that of the velocity of money in terms of the required reserve ratio are presented in a good agreement with simulation results.
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