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American Economic Review: Vol. 96 No. 1 (March 2006)
AER Volume. 96, Issue 1 | 
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Money in a Theory of Banking
Article Citation
Diamond, Douglas W., and
Raghuram G. Rajan. 2006. "Money in a Theory of Banking."
The American Economic Review,
96(1): 30-53.
DOI: 10.1257/000282806776157759
DOI: 10.1257/000282806776157759
Abstract
We examine the role of banks in the transmission of monetary policy. In economies where banks use real demand deposits to finance their lending, fluctuations in the timing of production can force banks to scramble for real liquidity, or even fail, which can greatly affect lending and aggregate output. The adverse effect on output can be reduced if banks finance with nominal deposits. Nominal deposits also open a "financial liquidity" channel for monetary policy to affect real activity. The banking system may be better off, however, issuing real deposits (e.g., foreign exchange denominated) under some circumstances.
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Authors
Diamond, Douglas W.
Rajan, Raghuram G.
Rajan, Raghuram G.
