A Theory of Money and Financial Institutions. Part 23. Fiat Money, Bank, Money, the Force of the Rate of Interest and the Vanishing Float,
YALE UNIV NEW HAVEN CONN COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
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In two previous papers it was argued that the existence of a positive money rate of interest in a dynamic general equilibrium system depends upon the presence of two types of money in the system. These two types of money can be interpreted as fiat money issued by the government and bank money which is created and destroyed by the banking system. The previous models were formulated in terms of a discrete trading market with expenditures on trade and receipts of the goods taking place at the start of each period and receipt of income from the sale of goods obtained at the start of the next period. This formulation creates a one period float of money which has been spent by the buyers but not received by the sellers. It was argued that in order to obtain a money rate of interest in conformity with our intuitive understanding of the relationship between a real or natural rate of interest it is necessary to issue at no interest change an amount of fiat money which precisely covers the float in the first period of trade. This paper is devoted to showing that this result still holds even if trade takes place continuously and hence even if the size of the float is apparently diminished.
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