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On Separation between Payment and Saving Instruments
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On Separation between Payment and Saving Instruments

Author

Listed:
  • Hajime Tomura

    (Faculty of Political Science and Economics, Waseda University)

Abstract

This paper presents a three-period model to analyze why central-bank notes, i.e., payment instruments, and bank deposits, i.e., saving instruments, must be separated from each other as is the case in the modern banking system. The model shows that credit creation by note-issuing commercial banks improves risk sharing in the economy, because private bank notes can serve as payment instruments backed by a diversified pool of commercial bills issued by payers. If there are sunk costs of production, however, this characteristic of private bank notes can cause a self-fulfilling mass refusal of private bank notes by payees. Commercial banks can reduce the amount of reserves necessary to prevent such a bank-note run if they set up a conduit that issues only payment instruments, which corresponds to the central bank. The model replicates short-term re-discounting of commercial bills by the central bank as the optimal policy endogenously.

Suggested Citation

  • Hajime Tomura, 2019. "On Separation between Payment and Saving Instruments," Working Papers 1813, Waseda University, Faculty of Political Science and Economics.
    • Handle: RePEc:wap:wpaper:1813
    as

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    References listed on IDEAS

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