Creator: Smith, Bruce D., d. 2002. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 258 Abstract:
Recent developments in the theory of economies with private information permit a re-examination of the issues raised in the "real bills-quantity theory" debate. A model is developed here in which there are banks, in which fiat money is present, and in which agents possess private information. Two regulatory regimes are then considered. In the first, banks are essentially unregulated. In the second, banks face 100 percent reserve requirements. Issues related to existence and optimality of equilibrium are addressed, and problems with existence are given an interpretation in terms of the "stability" of the banking system. Existence (stability) problems which arise under laissez-faire banking can be rectified by a 100 percent reserve requirement. However, unless there is private information regarding access to investment opportunities, there are typically better ways to accomplish this. Finally, it is shown that even in the presence of 100 percent reserve requirements banks are not simply "money warehouses." Bank deposits and money bear different (real) return streams, even under 100 percent reserves.
Keyword: Financial intermediaries, Equilibrium, Real bills-quantity theory, Bank, Regulation, and Fiat money Subject (JEL): D82 - Information, knowledge, and uncertainty - Asymmetric and private information and G21 - Financial institutions and services - Banks ; Other depository institutions ; Micro finance institutions ; Mortgages
Creator: Smith, Bruce D., d. 2002. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 234 Abstract:
Current approaches to monetary theory and policy owe much to the "quantity theory of money." However, recent theoretical developments suggest that the manner in which money is introduced is more important, even for price level movements, than the quantity of money. Colonial American experience provides a laboratory for discriminating between these views. It is shown here that the nature of backing, rather than the quantity of money, determined its value. Large secular inflations were ended by changing the nature of backing despite the continuance of large note issues (and despite the absence of a metallic standard). Extremely large note issues and note withdrawals are shown not to have produced inflation (currency depreciation) or deflation (currency appreciation).
Keyword: Quantity theory, Colonial America, Fiat money, and Currency Subject (JEL): E42 - Money and interest rates - Monetary systems ; Standards ; Regimes ; Government and the monetary system ; Payment systems, E52 - Monetary policy, central banking, and the supply of money and credit - Monetary policy, and N11 - Macroeconomics and monetary economics ; Growth and fluctuations - United States ; Canada : Pre-1913