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Time Inconsistency in Fractional Reserve Banking, Interpretation of M. Allais’s Criticism to Interests’ Equilibriums in Credit Mechanism
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Abstract: (6186 Views) |
| Time Preference plays a prominent role in existence of interest rate and its origin. The Neoclassical economists believe that time preference equals interest rate and this equilibrium is especially necessary for monetary equilibrium. But in economic literature, particularly in government’s political economy, disequilibrium between these two phenomena is known as time inconsistency. Time inconsistency in fractional reserve banking has an important role in depositors’ behavior analysis and banking performance.
In this paper we are surveying time inconsistency in banking system as well as explaining economists’ attitudes about time preference and interest rate. In this regard, the paper is modeling household dynamic consuming behavior, with assuming Clawer Constrain. As a result, time inconsistency in fractional reserve banking can create serious challenges in continuity of this system through demand for money and banking’s debt.
This paper proved that banking’s rate of interest (as a general rate of interest) cannot equal discount rate (as a time preference) in finite time and equality exceptionally exist for infinite time which it is mean Fractional Banking System cannot continue its activity in infinite horizon |
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| Keywords: Fractional Reserve Banking System, Time Preference, Interest Rate, Time Inconsistency, Dynamic Optimization. |
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Type of Study: Research |
Subject:
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