Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/192882
Authors: 
Andolfatto, David
Berentsen, Aleksander
Martin, Fernando M.
Year of Publication: 
2017
Series/Report no.: 
Working Paper 259
Abstract: 
The fact that money, banking, and financial markets interact in important ways seems self-evident. The theoretical nature of this interaction, however, has not been fully explored. To this end, we integrate the Diamond (1997) model of banking and financial markets with the Lagos and Wright (2005) dynamic model of monetary exchange - a union that bears a framework in which fractional reserve banks emerge in equilibrium, where bank assets are funded with liabilities made demandable for government money, where the terms of bank deposit contracts are constrained by the liquidity insurance available in financial markets, where banks are subject to runs, and where a central bank has a meaningful role to play, both in terms of inflation policy and as a lender of last resort. The model provides a rationale for nominal deposit contracts combined with a central bank lender-of-last-resort facility to promote efficient liquidity insurance and a panic-free banking system.
Subjects: 
Money
banking
financial markets
monetary policy
JEL: 
E50
E60
D53
D02
G21
Document Type: 
Working Paper
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