publication . Preprint . 2002

Deposit Money Creation in Search Equilibrium

Keiichiro Kobayashi;
Open Access
  • Published: 01 Jun 2002
The endogenous creation of bank credit and of deposit money is modeled. If banks have a limited ability to commit to making interbank loans, then, in order for bank deposits to be accepted as liquid assets, an upper bound is placed upon the size of each bank's asset portfolio, where the bound is determined as a certain multiple of the bank's capital. In our search model, the Central Limit Theorem implies that the multiplier is a non-linear function of the aggregate level of bank assets. Thus when banks have little capital, there emerges an inefficient equilibrium where the production level is low and unemployment exists. In the case where the initial value of ba...
free text keywords: Limited ability to commit; the interbank market; the Central Limit Theorem; search model, jel:E51, jel:G21, jel:E44, jel:C72

Diamond, D.W. and R.G. Rajan (2001), “Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking,” Journal of Political Economy, 109: 287-327.

Diamond, P. (1984), “Money in Search Equilibrium,” Econometrica, 52: 1-20.

- (1982), “Aggregate Demand Management in Search Equilibrium,” Journal of Political Economy, 90: 881-894.

Powered by OpenAIRE Open Research Graph
Any information missing or wrong?Report an Issue