Monetary Policy and Bank Regulations in an Economy with Financial Innovations

Englund, Peter (author): Stockholms universitet,Institutet för internationell ekonomi

(creator_code:org_t)

Stockholm : IIES, 1987
English 28 s.
Series: Seminar Paper / Institute for International Economic Studies, Stockholm University, 0347-8769 ; 379

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Abstract Subject headings

This is a study of financial innovations and moves towards "the cashless society" in a general equilibrium cash-in-advance model. It is assumed that a subset of goods - cash goods and check goods - can only be purchased with tangible means of payment, i.e. cash and checks drawn on interest bearing bank accounts. financial innovations are modelled as a decrease in the fraction of such goods. In this world monetary policy and bank regulations have welfare effects. A main result is that Friedman's (1969) optimum quantity of money rule continues to hold in this setting. It does so because a non-zero interest rate distorts the composition of consumption. The general result is translated into results on the optimum rate of expansion of the supply of base money under different assumptions. We also study optimum reserve requirements on banks.

About the subject

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