IDEAS home Printed from https://ideas.repec.org/a/bpj/bejmac/vtopics.3y2003i1n3.html
   My bibliography  Save this article

``To Furnish an Elastic Currency'': Banking, Aggregate Risk, and Welfare

Author

Listed:
  • Loewy Michael B.

    (University of South Florida)

Abstract

The Federal Reserve Act calls upon the newly created Banks "... to furnish an elastic currency..." since such action was thought to be welfare improving during times of high currency demand. This paper considers the welfare implications of an "elastic currency" regime within the context of an overlapping generations model of fiat money that includes banks that face aggregate risk. Although in the economy's stationary equilibrium the bank chooses to hold both fiat currency and illiquid capital in its portfolio, it would prefer to hold additional amounts of currency (were they available) during periods of high withdrawal demand. To remedy this problem, a central bank is introduced that offers zero-interest, intraperiod loans of currency via a discount window. When the central bank optimally chooses the size of the loan, it is shown that the resulting stationary equilibrium supports the economy's "golden rule" allocation.

Suggested Citation

  • Loewy Michael B., 2003. "``To Furnish an Elastic Currency'': Banking, Aggregate Risk, and Welfare," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-19, March.
    • Handle: RePEc:bpj:bejmac:v:topics.3:y:2003:i:1:n:3
    DOI: 10.2202/1534-5998.1052
    as

    Download full text from publisher

    File URL: https://doi.org/10.2202/1534-5998.1052
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.
    File URL: https://libkey.io/10.2202/1534-5998.1052?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Freeman, Scott, 1996. "The Payments System, Liquidity, and Rediscounting," American Economic Review, American Economic Association, vol. 86(5), pages 1126-1138, December.
    2. Michael Sproul, 1998. "Backed Money, Fiat Money, and the Real Bills Doctrine," UCLA Economics Working Papers 774B, UCLA Department of Economics.
    3. Freeman, Scott, 1999. "Rediscounting under aggregate risk," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 197-216, February.
    4. Temzelides, Theodosios, 1997. "Evolution, coordination, and banking panics," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 163-183, September.
    5. Qi, Jianping, 1994. "Bank Liquidity and Stability in an Overlapping Generations Model," The Review of Financial Studies, Society for Financial Studies, vol. 7(2), pages 389-417.
    6. Stephen D. Williamson, 1998. "Discount Window Lending and Deposit Insurance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 246-275, January.
    7. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    8. Jacklin, Charles J & Bhattacharya, Sudipto, 1988. "Distinguishing Panics and Information-Based Bank Runs: Welfare and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 568-592, June.
    9. Michael Sproul, 1994. "The real Bills Doctrine," UCLA Economics Working Papers 712, UCLA Department of Economics.
    10. James Peck & Karl Shell, 2003. "Bank Portfolio Restrictions and Equilibrium Bank Runs," Levine's Bibliography 666156000000000077, UCLA Department of Economics.
    11. Bruce Champ & Bruce D. Smith & Stephen D. Williamson, 1996. "Currency Elasticity and Banking Panics: Theory and Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 828-864, November.
    12. repec:bla:jfinan:v:43:y:1988:i:3:p:749-61 is not listed on IDEAS
    13. James Peck & Karl Shell, 2003. "Equilibrium Bank Runs," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 103-123, February.
    14. Jacklin, Charles J., 1993. "Market rate versus fixed rate demand deposits," Journal of Monetary Economics, Elsevier, vol. 32(2), pages 237-258, November.
    15. Sargent, Thomas J & Wallace, Neil, 1982. "The Real-Bills Doctrine versus the Quantity Theory: A Reconsideration," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1212-1236, December.
    16. Ruilin Zhou, 2000. "Understanding intraday credit in large-value payment systems," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 25(Q III), pages 29-44.
    17. Bernardino Adao & Ted Temzelides, 1998. "Sequential Equilibrium and Competition in a Diamond-Dybvig Banking Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(4), pages 859-877, October.
    18. Alonso, Irasema, 1996. "On avoiding bank runs," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 73-87, February.
    19. Sargent, Thomas J, 1982. "Beyond Demand and Supply Curves in Macroeconomics," American Economic Review, American Economic Association, vol. 72(2), pages 382-389, May.
    20. Kahn, Charles M. & Roberds, William, 2001. "Real-time gross settlement and the costs of immediacy," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 299-319, April.
    21. Loewy, Michael B., 1998. "Information-Based Bank Runs in a Monetary Economy," Journal of Macroeconomics, Elsevier, vol. 20(4), pages 681-702, October.
    22. Freeman, Scott, 1988. "Banking as the Provision of Liquidity," The Journal of Business, University of Chicago Press, vol. 61(1), pages 45-64, January.
    23. Loewy, Michael B., 1991. "The macroeconomic effects of bank runs: An equilibrium analysis," Journal of Financial Intermediation, Elsevier, vol. 1(3), pages 242-256, June.
    24. Neil Wallace, 1990. "A banking model in which partial suspension is best," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 14(Fall), pages 11-23.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Janet Hua Jiang, 2008. "Banking crises in monetary economies," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 41(1), pages 80-104, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Loewy, Michael B., 1998. "Information-Based Bank Runs in a Monetary Economy," Journal of Macroeconomics, Elsevier, vol. 20(4), pages 681-702, October.
    2. Dwyer Jr., Gerald P. & Samartín, Margarita, 2009. "Why do banks promise to pay par on demand?," Journal of Financial Stability, Elsevier, vol. 5(2), pages 147-169, June.
    3. Antinolfi, Gaetano & Keister, Todd, 2006. "Discount Window Policy, Banking Crises, And Indeterminacy Of Equilibrium," Macroeconomic Dynamics, Cambridge University Press, vol. 10(1), pages 1-19, February.
    4. Antoine Martin, 2005. "Reconciling Bagehot with the Fed's response to September 11," Staff Reports 217, Federal Reserve Bank of New York.
    5. Gorton, Gary & Winton, Andrew, 2003. "Financial intermediation," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 8, pages 431-552, Elsevier.
    6. Antoine Martin, 2009. "Reconciling Bagehot and the Fed's Response to September 11," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2‐3), pages 397-415, March.
    7. Parnes, Dror, 2021. "Modeling the contagion of bank runs with a Markov model," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 174-187.
    8. Geethanjali Selvaretnam, 2014. "Optimal Reserves and Short-Term Interest Rates in a Model of Bank Runs," Scottish Journal of Political Economy, Scottish Economic Society, vol. 61(5), pages 537-558, November.
    9. Franklin Allen & Douglas Gale, 2003. "Financial Fragility, Liquidity and Asset Prices," Center for Financial Institutions Working Papers 01-37, Wharton School Center for Financial Institutions, University of Pennsylvania.
    10. Antinolfi, Gaetano & Huybens, Elisabeth & Keister, Todd, 2001. "Monetary Stability and Liquidity Crises: The Role of the Lender of Last Resort," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 187-219, July.
    11. Antoine Martin, 2006. "Liquidity provision vs. deposit insurance: preventing bank panics without moral hazard," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 28(1), pages 197-211, May.
    12. Janet Hua Jiang, 2008. "Banking crises in monetary economies," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 41(1), pages 80-104, February.
    13. Niinimaki, Juha-Pekka, 2002. "Do time deposits prevent bank runs?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 12(1), pages 19-31, February.
    14. Arifovic, Jasmina & Jiang, Janet Hua, 2019. "Strategic uncertainty and the power of extrinsic signals– evidence from an experimental study of bank runs," Journal of Economic Behavior & Organization, Elsevier, vol. 167(C), pages 1-17.
    15. Chatterji, Shurojit & Ghosal, Sayantan, 2010. "Liquidity, moral hazard and bank crises," CAGE Online Working Paper Series 27, Competitive Advantage in the Global Economy (CAGE).
    16. Chatterji, S. & Ghosal, S., 2008. "Moral hazard, bank runs and contagion," Economic Research Papers 269785, University of Warwick - Department of Economics.
    17. Ennis, Huberto M. & Keister, Todd, 2003. "Economic growth, liquidity, and bank runs," Journal of Economic Theory, Elsevier, vol. 109(2), pages 220-245, April.
    18. Todd Keister, 2016. "Bailouts and Financial Fragility," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(2), pages 704-736.
    19. Vincent Bignon & Marc Flandreau & Stefano Ugolini, 2012. "Bagehot for beginners: the making of lender‐of‐last‐resort operations in the mid‐nineteenth century," Economic History Review, Economic History Society, vol. 65(2), pages 580-608, May.
    20. Fernando Martin & Aleksander Berentsen & David Andolfatto, 2016. "Financial Fragility in Monetary Economies," 2016 Meeting Papers 1626, Society for Economic Dynamics.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:bejmac:v:topics.3:y:2003:i:1:n:3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.