Inside money creation out of thin air: a general equilibrium perspective

264 Pages·2017·1.9 MB·English

ETH Library
Inside money creation out of
thin air: a general equilibrium
perspective
Doctoral Thesis
Author(s):
Faure, Salomon A.
Publication date:
2017
Permanent link:
https://doi.org/10.3929/ethz-b-000188117
Rights / license:
In Copyright - Non-Commercial Use Permitted
Funding acknowledgement:
137570 - Monetary Policy and Banking Regulation During Normal Times and Crises (SNF)
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DISS. ETH NO. 24299
INSIDE MONEY CREATION OUT OF THIN AIR:
A GENERAL EQUILIBRIUM PERSPECTIVE
A thesis submitted to attain the degree of
DOCTOR OF SCIENCES of ETH ZURICH
(Dr. sc. ETH Zurich)
presented by
¨
SALOMON AMAEL FAURE
´
Ing´enieur des Arts et Manufactures, Ecole Centrale Paris
Master of Science ETH in Management, Technology, and Economics, ETH Zurich
born on 28 April 1989
citizen of France and Germany
accepted on the recommendation of
Prof. Dr. Hans Gersbach, examiner
Prof. Dr. Antoine Bommier, co-examiner
2017
Abstract
We study inside money creation by commercial banks in today’s monetary archi-
tecture and examine the impact of monetary policy and capital regulation in a
general equilibrium setting. In our model, there are two production sectors, fi-
nancial intermediation, aggregate shocks, safe deposits, and two types of money
created: bank deposits created when banks grant loans to firms or to other banks,
and central bank money created when the central bank grants loans to private
banks. We demonstrate that in the baseline model, equilibria yield the first-best
level of money creation and lending when prices are flexible, regardless of mone-
tary policy or capital regulation. Under rigid prices, we identify the circumstances
in which money creation is excessive or breaks down, and the ones in which an
adequate combination of monetary policy and capital regulation can restore effi-
ciency. Under normal economic conditions, an adequate combination of monetary
policy and capital regulation can restore the existence of equilibria and efficiency.
A slump in money creation and lending can only be avoided if economic conditions
are sufficiently favorable. Our main findings can be extended to various changes to
our assumptions, such as the denomination of bonds and of profit maximization,
the extent of the macroeconomic shock, the form of the production functions in
the two sectors we defined, additional states of the world, the households’ risk
aversion, and the introduction of savings decisions, for example. Moreover, if the
real deposit rates do not adjust to the macroeconomic shock, we demonstrate that
only capital requirements that are sufficiently high can establish the existence and
uniqueness of efficient equilibria with banks. If banks incur costs in real terms for
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the issuance of their equity, we prove that governmental authorities can use mon-
etary policy and capital requirements to implement any welfare that is arbitrarily
close to the first-best welfare. We show that reserve requirements coupled with
haircuts are equivalent to capital requirements as to their effect on banks’ money
creation. We also show that inefficient asymmetric equilibria may also arise when
prices are flexible, but that these inefficient equilibria are eliminated if capital re-
quirements are sufficiently high, so that only the efficient equilibria with banks
persist. We find that deposit insurance increases welfare in our setting. If there
are financial frictions at bank level and if these frictions are not too intense, we
demonstrate that the second-best allocation can only be implemented by a com-
bination of monetary policy and capital regulation. Finally, we outline alternative
monetary architectures in which money is solely created by the central bank, and
we discuss some of their properties.
R´esum´e
Nous ´etudions la cr´eation mon´etaire par les banques commerciales et nous exam-
inonsl’influencedelapolitiquemon´etaireetdesr´egulationsenmati`eredecapitaux
propres sur cette cr´eation mon´etaire dans le cadre d’un mod`ele d’´equilibre g´en´eral
fond´e sur la structure du syst`eme bancaire actuel. Notre mod`ele est compos´e de
deux secteurs de production, d’une interm´ediation financi`ere, d’un choc qui affecte
touteslesentreprisesd’undessecteursdeproduction, del’assurancedesd´epoˆtspar
le gouvernement, ainsi que de deux monnaies: les d´epoˆts bancaires cr´e´es au mo-
ment ou` les banques priv´ees octroient des prˆets et la monnaie de banque centrale
´emise lors d’un emprunt d’une banque commerciale a` la banque centrale. Nous
d´emontrons que, dans le mod`ele de r´ef´erence, les´equilibres sont associ´es au niveau
optimal de cr´eation mon´etaire et de cr´edit lorsque les prix sont flexibles, et ceci
ind´ependamment de la politique mon´etaire choisie et des r´egulations en mati`ere
de capitaux propres. Lorsque les prix sont rigides, nous identifions les circon-
stances macro´economiques pour lesquelles la cr´eation mon´etaire est excessive ou
insuffisante, ainsi que celles pour lesquelles une politique mon´etaire ad´equatement
combin´eeavecuner´eglementationdesfondspropresr´etablitl’existenced’´equilibres
mon´etaires et la meilleure allocation des ressources: dans des conditions macro-
´economiques normales, une politique mon´etaire et une r´eglementation des fonds
propres appropri´ees peuvent offrir un cadre propice a` l’existence d’´equilibres et a`
la performance´economique. Cependant, un effondrement de la cr´eation mon´etaire
et des cr´edits ne peut ˆetre ´evit´e dans des conditions macro´economiques trop
d´efavorables. Nos conclusions principales restent valables lorsque les hypoth`eses
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suivantes sont modifi´ees: quand le choc macro´economique est global, quand la
forme des fonctions de production est g´en´eralis´ee, quand d’autres ´etats macro-
´economiques sont ajout´es, quand les m´enages ont une aversion pour le risque, et
quand les m´enages doivent consommer et investir en mˆeme temps. De plus, si
les taux d’int´erˆets sur les comptes courants en termes r´eels ne s’ajustent pas au
choc macro´economique, nous prouvons que seule une r´eglementation des fonds
propres assez stricte peut ´etablir l’existence et l’unicit´e d’´equilibres optimaux.
Lorsque l’´emission des fonds propres engendre des couˆts pour les banques, nous
d´emontrons que les autorit´es gouvernementales peuvent coordonner la politique
mon´etaire et la r´eglementation des fonds propres pour atteindre tout niveau de
bien-ˆetre social arbitrairement proche du niveau optimal. Nous d´emontrons que
la r´eglementation des r´eserves, associ´ee a` une d´ecote sur les garanties, a un effet
´equivalenta`lar´egulationenmati`eredecapitauxpropressurlacr´eationmon´etaire.
Nous prouvons que des ´equilibres asym´etriques peuvent aussi apparaˆıtre lorsque
les prix sont flexibles et que certains de ces ´equilibres asym´etriques sont associ´es a`
une affectation inefficace des ressources. Ces ´equilibres peuvent ˆetre ´elimin´es par
l’instaurationd’uner´eglementationdesfondspropresassezstricte, detellemani`ere
queseulsles´equilibresimpliquantuneaffectationefficacedesressourcessubsistent.
Nous d´ecouvrons aussi que, dans notre mod`ele, la r´eglementation d’assurance des
d´epˆots a un effet positif sur le bien-ˆetre social. Nous d´emontrons que, lorsque
des frictions financi`eres sont introduites au niveau bancaire, la deuxi`eme meilleure
affectation des ressources peut ˆetre impl´ement´ee par une combinaison ad´equate de
politique mon´etaire et de r´eglementation sur les capitaux propres. Pour conclure,
nous donnons un aper¸cu d’autres architectures mon´etaires pour lesquelles la mon-
naie serait seulement ´emise par la banque centrale et nous discutons certaines de
leurs propri´et´es.
Acknowledgments
My first and foremost acknowledgments for my doctoral thesis are undoubtedly
addressedtoProfessorHansGersbach,towhomIamverygratefulforhisguidance,
his support, and his example. I am also greatly indebted to Professor Antoine
Bommier for his advice and his availability as a co-examiner during his sabbatical
leave as well as to Professor Didier Sornette for immediately accepting to chair my
PhD defense.
I greatly benefited from discussions with my colleague Dr. Volker Britz and partic-
ularly from his expertise in general equilibrium theory. His comments and insights
helped me substantially improve the mathematical structure of my main results.
I received financial support from the Risk Center at ETH Zurich, where I was a
doctoral student member within the “ETH48 Systemic Risk – Systemic Solutions”
project, fromthetwoprojectsoftheSwissNationalScienceFoundation“Monetary
Policy and Banking Regulation in Normal Times and Crises” (SNF project no.
100018 137570)and“MoneyCreationbyBanks,MonetaryPolicy,andRegulation”
(SNF project no. 100018 165491/1), as well as from the Chair of Macroeconomics:
Innovation and Policy at ETH Zu¨rich, which is led by Professor Hans Gersbach. I
thank all these institutions and all persons involved.
IreceivedveryinsightfulsuggestionsandremarksaboutChapter2,whichIhadthe
opportunity to present at the Risk Center of ETH Zurich, in the Astute Modeling
SeminaratETHZurich, andinaresearchseminarattheSwissNationalBank. For
their thorough understanding and their inspiring comments, I thank in particular
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Professor Cyril Monnet, Professor Hans Haller, Professor Clive Bell, Professor
Frank Schweitzer, Dr. Michael Kumhof, Dr. Leonardo Melosi, and Dr. Stephan
Imhof. I really appreciated the opportunity given by Professor Cyril Monnet to
present my work at the Swiss National Bank.
I also thank Professor Dirk Niepelt, Professor Martin Brown, Dr. Toni Beutler, Dr.
Mathieu Grob´ety, Dr. Adriel Jost, Dr. Christoph Basten, Antonios Koumbarakis,
and Damien Klossner for interesting conversations.
Of course, I express my gratefulness to all my former and current colleagues for the
constructive team work and the very pleasant atmosphere, with special gratitude
to Professor Maik Schneider, 刘玉林博士 (Dr. Yulin Liu), Stylianos Papageorgiou,
Aschkan Mery, and 朱致远 (Zhiyuan Zhu) for detailed discussions on my work. I
am particularly indebted to Stylianos Papageorgiou and Aschkan Mery for their
very careful and very helpful proofreading. Outside my workplace, my horizon was
enlarged by fascinating ideas connected to monetary architectures in the area of
law discussed with Adrien Clinard and with Simon Janin in the area of cryptocur-
rencies.
J’aimerais aussi remercier chaleureusement tous mes amis, qui m’ont soutenu et se
sont mˆeme parfois int´eress´es au sujet de cette th`ese. Ceux qui liront ces lignes se
reconnaˆıtront. J’exprime aussi ma sinc`ere et profonde gratitude a` Anne Buechi et
au professeur Jean-Paul Thommen pour m’avoir sauv´e d’une situation tr`es p´enible
au moment crucial d’´ecriture de la th`ese.
Maman, Papa, Andr´e, Laumer, et Aljosha,
Je vous remercierai du fond du cœur pour tout
Tant que je le pourrai. L’Alpha et l’Om´ega,
C’est vous. Je n’en serais pas venu seul `a bout.
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Contents
Abstract ii
R´esum´e iv
Acknowledgments vi
Contents ix
List of Figures xii
List of Tables xvi
1 Introduction 1
1.1 Motivation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Research Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.3 Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.4 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2 Money Creation in a General Equilibrium Model 16
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.2 Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.3 Equilibria with Banks . . . . . . . . . . . . . . . . . . . . . . . . . 37
2.4 Price Rigidities and Capital Requirements . . . . . . . . . . . . . . 44
Appendices 52
ix