Credit, banking, liquidity shortfall, and monetary policy

Hyung Sun Choi, Manjong Lee

Research output: Contribution to journalArticle

4 Citations (Scopus)

Abstract

A simple monetary model is constructed to explore dynamic interactions among the choice of means of payment, bank's reserves, a liquidity shortfall, and monetary policy. In the presence of credit-transaction cost shocks, a bank that issues credit can face a liquidity shortfall as its ex-ante reserves fall short of liquidity demand. In equilibrium, credit payments and collections by a bank are balanced with each other and hence bank's ex-post reserve holdings crucially depend on the demand for cash. The likelihood of a liquidity shortfall increases with credit-transaction costs due to larger cash withdrawals. When the government increases money growth, both the demand for cash and the likelihood of a liquidity shortfall increase.

Original languageEnglish
Pages (from-to)87-99
Number of pages13
JournalInternational Review of Economics and Finance
Volume46
DOIs
Publication statusPublished - 2016 Nov 1

Keywords

  • Banking
  • Cash
  • Credit
  • Liquidity shortfall
  • Monetary policy
  • Reserves

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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