DEMAND DEPOSIT BANKING AND OPEN MARKET OPERATIONS

Abstract


The institutional combination of illiquid assets and demand deposit banking is regarded as vulnerable to collapse because of the impatience of depositors. We suggest that the mechanism of fully backed central bank money is a means of redress. The vehicle is the state space representation of standard dynamic ways of treating the problem.

Keyword: bank collapse, accommodating monetary policy

JEL Classification Nos. E52, E61.