Article ID Journal Published Year Pages File Type
957704 Journal of Economic Theory 2007 25 Pages PDF
Abstract

In monetary models where agents are subject to trading shocks there is typically an ex post inefficiency since some agents are holding idle balances while others are cash constrained. This problem creates a role for financial intermediaries, such as banks, who accept nominal deposits and make nominal loans. In general, financial intermediation improves the allocation. The gains in welfare come from the payment of interest on deposits and not from relaxing borrowers’ liquidity constraints. We also demonstrate that when credit rationing occurs increasing the rate of inflation can be welfare improving.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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