Money with Bank Networks

Abstract

We allow banks to choose between two networks in a simple version of the Cavalcanti and Wallace (1999) model of inside money. Members of a network have access to credit but must redeem banknotes issued by other members in random meetings. We find equilibria in which members of a particular network issue more valuable notes, but face the same ex-ante payoff as that of their competition . Banks are shown to be concerned with both credit externalities and with monetary liabilities. When the size of the bank sector is small, these two opposing forces may result in a stable equilibrium.