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LIQUIDITY, MONEY CREATION AND DESTRUCTION, AND THE RETURNS TO BANKING*
Author(s) -
De O. Cavalcanti Ricardo,
Erosa Andrés,
Temzelides Ted
Publication year - 2005
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2005.00341.x
Subject(s) - market liquidity , bank run , monetary economics , float (project management) , economics , open market operation , bank reserves , demand deposit , statutory liquidity ratio , reserve requirement , bank failure , business , liquidity risk , official cash rate , financial system , bank rate , monetary policy , central bank , accounting liquidity , management
We build on our earlier model of money in which bank liabilities circulate as a medium of exchange. We investigate optimal bank behavior and the resulting provision of liquidity under a range of central bank regulations. In our model, banks issue inside money under fractional reserves, facing the possibility of excess redemptions. Banks consider the float resulting from money creation and make reserve‐management decisions that affect aggregate liquidity conditions. Numerical examples demonstrate positive bank failure rates when returns to banking are low. Central bank interventions may improve banks' returns and welfare through a reduction in bank failure.