Carlos Pérez, Universidad Finis Terrae

Paper: “A Model of Banking Without Fiat Money”

Abstract: This paper presents a model in which private banknotes have value because they serve as a means of repayment. Banks produce banknotes to grant loans and only accept banknotes in return, creating demand for them. Despite lack of production costs and reserve requirements, the equilibrium quantity of banknotes is finite, due to limited demand for loans and nonnegativity of bank net worth. There are multiple rational expectations equilibria because inflation expectations are self-fulfilling, and contracts are nominal. In addition, alternative trading arrangements such as Arrow securities and bonds are implementable as banking equilibria.