Working Paper No. 12-11/r Private Money and Banking Regulation
نویسندگان
چکیده
We establish a fundamental relationship between the return on the banking sectors assets and each bankers willingness to supply liabilities that facilitate payments and settlement (private money). In particular, we show that the regulation of lending practices is necessary for the optimal provision of private money. In an environment in which bankers cannot commit to their promises, an unregulated banking sector fails to implement an e¢ cient allocation. We show that an intervention that raises the value of the bankersassets (e.g., by regulating lending practices) will make them willing to o¤er a higher return on their liabilities. In particular, if the return on their assets is made su¢ ciently large, then it is possible to implement an e¢ cient allocation with private money. Keywords: Private money; banking regulation; limited commitment. JEL classi cation: E42, G21, G28.
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