Ratio Working Papers
Clearing vs. Leakage: Does Note Monopoly Increase Money and Credit Cycles?
Abstract: The effects of note monopolisation on the amplitude of
money and credit cycles are studied. Note monopolisation trades clearing
for leakage. If the central bank's reserve ratio is larger than that of the
commercial banks, and if the currency-deposit ratio is sufficiently large,
the leakage effect could domi-nate the loss-of-clearing effect (base
expansion), such that the credit capacity of the banking system decreases.
This was the case when the Bank of Sweden gained a note monopoly in 1904.
Money and credit cycles should therefore have become smaller. Swedish bank
data for 1871–1938 reveal that money cycles became smaller, but credit
cycles larger. The latter is attributed to an increasing time-demand
deposit ratio, which increases the credit capacity of the banking
Keywords: Clearing mechanism; Credit expansion; Currency-deposit ratio; Fiduciary money; Free banking; Leakage; Money multiplier; (follow links to similar papers)
JEL-Codes: E32; E42; E51; (follow links to similar papers)
25 pages, February 16, 2005
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