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Chao Gu, Fabrizio Mattesini, Cyril Monnet, Randall Wright, Banking: A New Monetarist Approach, The Review of Economic Studies, Volume 80, Issue 2, April 2013, Pages 636–662, https://doi.org/10.1093/restud/rds037
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Abstract
We develop a model where: (i) banks take deposits and make investments; (ii) their liabilities facilitate third-party transactions. Other models have (i) or (ii), not both, although we argue they are intimately connected: we show that they both emerge from limited commitment. We describe an environment, characterize desirable allocations, and interpret the outcomes as banking arrangements. Banks are essential: without them, the set of feasible allocations is inferior. As a technical contribution, we characterize dynamically optimal credit allocations with frictions, show they involve backloading, and analyse how this interacts with banking. We also confront the theory with economic history.