Abstract
In this paper we show that in a world where productive investment is allocated according to the CAPM, a fractional reserve banking system that facilitates investing and money creation is not Pareto efficient and leads to excessive productive investment that in turn amplifies future business cycles. These results follow from a model based on CAPM, rational expectations and a linear homogenous production function. The regulatory process should consider going even further than the Volcker rule by restricting bank investments to currency in vault and deposit accounts on the central bank. Nonbank financial institutions should then carry out the risky financial intermediation function and trading now carried out by banks.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
