Monetary, Fiscal, and Bank Regulatory Policy in a Simple Monetary Growth Model

We consider an otherwise conventional monetary growth model in which spatial separation and limited communication create a transactions role for currency, and stochastic relocation gives rise to financial intermediaries. In this framework we consider how changes in fiscal and monetary policy, and in reserve requirements, affect inflation, capital formation, and nominal interest rates. There is also considerable scope for multiple equilibria; we show how reserve requirements that never bind along actual equilibrium paths can play an important role in avoiding undesirable equilibria. Finally, we demonstrate that changes in (apparently) nonbinding reserve requirements can have significant real effects.