ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Finance, Banking, Money, in That Order

Finance, Banking, Money, in That Order

The “Banking: Theory & Policy” class of 2020–21 was a sounding board. The comments of an anonymous reviewer added value to an earlier draft. The usual caveats apply.

This paper engages with a standard text in financial economics. The heart of the enterprise is a putative social welfare-maximising project. All agents value the project. The input–output vector is one component in a portfolio of financial assets. A “no output-employment” outcome is demonstrated. The project may succeed or fail. Accordingly, bank runs may be bad or good.

A resolution is proposed in the form of a European put option on the project. Equity and a government bond are introduced to fulfil the arbitrage principle. The central bank divides into two parts in support. An “investment trust” participates in the equity and bond market. On the other side of the firewall is a narrow bank which meets the liquidity needs of the system.

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Updated On : 15th May, 2021


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