A monetary mechanism for sharing capital: Diamond and Dybvig meet Kiyotaki and Wright

Summary

A model is presented in which banks update public records, accept deposits of fiat money and intermediate capital. I show that inside money is more liquid than outside money, increasing the turnover rates of idle capital. The model offers a simple explanation for the dual role of financial institutions: Banks are monitored and can issue nominal assets upon request, which helps them to transfer capital in sufficiently high rates and to also become intermediaries. The model shares some features with those of Diamond and Dybvig [5], and Kiyotaki and Wright [7].

I thank two anonymous referees, Susumu Imai, B. Ravikumar and Neil Wallace, as well as participants at the Economic Theory symposium “Recents Developments in Money and Finance,” and seminar participants at the Richmond Fed, Queens University, and Sabanci University for comments on an early draft. The hospitality and financial support of the Cleveland Fed Central Bank Institute and CNPq are greatfully appreciated. The author’s opinions are not necessarily those of the Federal Reserve Bank of Cleveland or the Federal Reserve System.