ABSTRACTThis paper presents a simple means-of-payment-in-advance model where households can purchase the single consumption good with either deposits from a price taking representative bank or cash. We show that even if facilitating trade through deposits is physically costly, such trade occurs in equilibrium if banks face a low enough reserve ratio. Thus it is possible that fractional reserve banking occurs in the unique equilibrium, but is strictly dominated by the equilibrium associate with a 100% reserve …
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