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The Broad Consequences Of Narrow Banking

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  • MATHEUS R. GRASSELLI

    (Department of Mathematics and Statistics, McMaster University, 1280 Main Street West, Hamilton ON L8S 4K1, Canada)

  • ALEXANDER LIPTON

    (Connection Science, Massachusetts Institute of Technology, 77 Massachusetts Ave, Cambridge, MA 02139, USA)

Abstract

We investigate the macroeconomic consequences of narrow banking in the context of stock-flow consistent models. We begin with an extension of the Goodwin–Keen model incorporating time deposits, government bills, cash, and central bank reserves to the base model with loans and demand deposits, and use it to describe a fractional reserve banking system. We then characterize narrow banking by a full reserve requirement on demand deposits and describe the resulting separation between the payment system and lending functions of the resulting banking sector. By way of numerical examples, we explore the properties of fractional and full reserve versions of the model and compare their asymptotic properties. We find that narrow banking does not lead to any loss in economic growth when both versions of the model converge to a finite equilibrium, while allowing for more direct monitoring and prevention of financial breakdowns in the case of explosive asymptotic behavior.

Suggested Citation

  • Matheus R. Grasselli & Alexander Lipton, 2019. "The Broad Consequences Of Narrow Banking," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 22(01), pages 1-22, February.
    • Handle: RePEc:wsi:ijtafx:v:22:y:2019:i:01:n:s0219024919500079
    DOI: 10.1142/S0219024919500079
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    References listed on IDEAS

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    Cited by:

    1. Matheus R. Grasselli & Alexander Lipton, 2021. "Cryptocurrencies and the Future of Money," Papers 2109.10177, arXiv.org.

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