Bank Deposits and Credit in General Equilibrium (2009)

We present a general equilibrium model of money with bank deposits and credit. Banks have two roles: first they act as safe-keepers of agents’ values, second they act as transaction operators because they are able to identify agents. We show that there exists an equilibrium where money co-exists with bank deposits although interest rates payed on deposits are positive. Further, we compare our model to the basic framework where banks only act as safe-keepers and are not allowed to issue loans. Finally, we show that loans are welfare improving and that the money multiplier is decreasing over the inflation rate.

Carlo Strub (2009). Bank Deposits and Credit in General Equilibrium. mimeo.