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Private Money and Reserve Management in a Random-Matching Model

Discussion Paper 128 | Published February 1, 1999

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Authors

Andrés Erosa

Ricardo de O. Cavalcanti

Ted Temzelides

Private Money and Reserve Management in a Random-Matching Model

Abstract

In this paper, we develop a model of money and reserve-holding banks. We allow for private liabilities to circulate as media of exchange in a random-matching framework. Some individuals, which we identify as banks, are endowed with a technology to issue private notes and to keep reserves with a clearinghouse. Bank liabilities are redeemed according to a stochastic process that depends on the endogenous trades. We find conditions under which note redemptions act as a force that is sufficient to stabilize note issue by the banking sector.


Published In: Journal of Political Economy (Vol. 107, No. 5, October 1999, pp. 929-945) https://doi.org/10.1086/250085