Households demand bank deposits for the liquidity services such assets provide. Higher yielding assets usually are available to finance future consumption. Nevertheless, the demand for bank liabilities enables banks to finance investment. One might therefore expect more capital in an economy...

This paper examines the interaction between the financial and real sectors of the economy within the framework of a stochastic, rational expectation model that distinguishes between inside and outside money. The model also can be used to study the impact of variations in the degree of...