Working Paper: CEPR ID: DP13955
Authors: Jason Roderick Donaldson; Giorgia Piacentino
Abstract: We develop a model in which, as in practice, bank debt is both a financial security used to raise funds and a kind of money used to facilitate trade. This dual role of bank debt provides a new rationale for why banks do what they do. In the model, banks endogenously perform the essential functions of real-world banks: they transform liquidity, transform maturity, pool assets, and have dispersed depositors. Moreover, they make their debt redeemable on demand. Thus, they are endogenously fragile. We show novel effects of narrow banking, suspension of convertibility, and some other policies.
Keywords: banking; private money; financial fragility; demandable debt
JEL Codes: G21; E40; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| issuance of demandable debt (H63) | higher market price (D41) |
| higher market price (D41) | increased borrowing capacity (G51) |
| issuance of demandable debt (H63) | increased borrowing capacity (G51) |
| sudden change in beliefs about future liquidity (E41) | money runs (E41) |
| money runs (E41) | early redemptions (J26) |
| money runs (E41) | liquidation of assets (G33) |