Money as a Mechanism in a Bewley Economy
Much concern has recently been expressed that both large, procyclical changes in bank assets
and “credit crunches” caused by bank reluctance to expand loans during recessions contribute to
economic instability. These effects are difficult to explain using the standard textbook model of
deposit expansion in which deposits are constrained only by reserve requirements. However,
these effects follow easily if the model is expanded to include a second, capital constraint.
