Banking with Inside Money: An Efficiency Analysis

2026

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This paper analyzes the efficiency of banking with inside money, finding that standard deposit contracts do not achieve the first-best allocation and that central bank policies have limited effectiveness.

* Examines how nominal Diamond-Dybvig economies with inside money perform compared to the first-best allocation.
* Investigates whether state-contingent deposit contracts can improve welfare and prevent bank runs.
* Analyzes the role of central banks and unconventional monetary policy in approximating efficient outcomes.

Tags: inside money, bank runs, monetary policy, financial intermediation, efficiency

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