Liquidity, Financial Intermediation, and Monetary Policy in a New Monetarist Model

Williamson, Stephen (2009): Liquidity, Financial Intermediation, and Monetary Policy in a New Monetarist Model.

Abstract

A model of monetary exchange with private financial intermediation is constructed. Claims on financial intermedaries of two types are traded in transactions: circulating notes and deposits. There can be a role for the government in supplying liqudity, and level changes in the money supply accomplished through open market operations can be nonneutral. A Friedman rule is suboptimal, due to costs of maintaining the stock of currency. The model is used to address some issues related to current monetary policy in the United States.

• Item Type: MPRA Paper
• Language: English
• Keywords: Monetary policy; financial intermediation; financial crisis
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates

References

Cavalcanti, R., Erosa, A., and Temzelides, T. 1999. "Private Money and Reserve Management in a Random Matching Model," Journal of Political Economy 107, 929-945.

Cavalcanti, R. and Wallace, N. 1999. "Inside and Outside Money as Alternative Media of Exchange," Journal of Money, Credit, and Banking 31, 443-457.

Champ, B., Smith, B., and Williamson, S. 1996. "Currency Elasticity and Banking Panics: Theory and Evidence," Canadian Journal of Economics 29, 828-864.

Diamond, D. and Dybvig, P. 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy 91, 401-419.

Friedman, M. 1960. A Program for Monetary Stability, Fordham University Press, New York.

Lagos, R. 2008. "Asset Prices and Liquidity in an Exchange Economy," working paper, New York University.

Lagos, R., and Rocheteau, G. 2008. "Money and Capital as Competing Media of Exchange," Journal of Economic Theory 142, 247-258.

Lagos, R. and Wright, R. 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy 113, 463--484.

Lester, B., Postlewaite, A., and Wright, R. 2009. "Information and Liquidity," working paper, University of Pennsylvania.

Sanches, D., and Williamson, S. 2008. "Money and Credit with Limited Commitment and Theft," forthcoming, Journal of Economic Theory.

Smith, B. and Weber, W. 1999. "Private Money Creation and the Suffolk Banking System," Journal of Money, Credit, and Banking 31, 624-659.

Williamson, S. 1987. "Financial Intermediation, Business Failures, and Real Business Cycles," Journal of Political Economy 95, 1196-1216.

Williamson, S. 1999. "Private Money," Journal of Money, Credit, and Banking 31, 469-491.

Williamson, S. and Wright, R. 2009. "New Monetarist Economics," working paper.