A monetary production model of financial firms is employed to investigate supply-side inside-money aggregation, augmented to include credit card transaction services. Inside money is a supply-side concept. Financial firms are conceived to produce monetary and credit card transaction services as outputs through financial intermediation. While credit cards provide transactions services, credit cards have never been included into measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities to assets. However, index number theory measures service flows and is based on microeconomic aggregation theory, not accounting. We derive theory needed to measure the supply of the joint services of credit cards and inside money, needed to estimate the output supply function and to compute value added. The data needed for empirical implementation of our theory are available online from the Center for Financial Stability in New York City.

This paper explores the hypothesis that the sources of economic and financial crises differ from those of noncrisis business cycle fluctuations. We employ Markov-switching Bayesian vector autoregressions (MS-BVARs) to gather evidence about the hypothesis on a long annual U.S. sample running from 1890 to 2010. The sample covers several episodes useful for understanding U.S. economic and financial history, which generate variation in the data that aids in identifying credit supply and demand shocks. We identify these shocks within MS-BVARs by tying credit supply and demand movements to inside money and its intertemporal price. The model space is limited to stochastic volatility (SV) in the errors of the MS-BVARs. Of the 15 MS-BVARs estimated, the data favor a MS-BVAR in which economic and financial crises and noncrisis business cycle regimes recur throughout the long annual sample. The best-fitting MS-BVAR also isolates SV regimes in which shocks to inside money dominate aggregate fluctuations.

Equilibrium indeterminacy due to economies of scale (ES) in financial intermediation is quantitatively examined in a monetary business-cycle environment. Financial intermediation provides deposits that serve as a substitute for currency to purchase consumption, and depositing decisions are susceptible to nonfundamental shocks to confidence. The analysis considers various assumptions on nominal rigidities and the timing of deposit decisions. The results suggest that indeterminacy arises for small ES, and the resulting confidence shocks qualitatively mimic monetary shocks. A calibration exercise concludes that U.S. economic volatility from this nonfundamental source has increased over time while volatility from fundamental sources has decreased.

This paper analyzes the role and importance of “inside” money, made out of commercial banks' liabilities, for a New Keynesian model of the type commonly used for monetary policy analysis. The active role of inside money stems from its unique role in allowing payment for at least some consumption goods; shocks to the production of inside money may therefore have real effects. A calibrated version of the model is shown to generate small, but nonnegligible effects of inside money shocks on output and inflation. Moreover, the presence of inside money in the model leads to a slight attenuation of the effect of technology and monetary policy shocks. Finally, it is found that it is optimal for monetary policy to react to inside money shocks, but reacting to inflation alone does not result in a significant loss of household welfare.

We consider an economy in which people choose between a random-matching sector and organized markets absent double-coincidence problems. Merchants in the organized markets issue bills of exchange. Pareto-ranked multiple equilibria exist with the extent of the market and circulation of private liabilities endogenously determined. If trade frictions are moderate, bills circulate as a general medium of exchange, and the level of specialization is higher relative to barter. In this case, higher inside liquidity is accompanied by more specialization. When all transactions take place in the organized markets, trading risk vanishes and the economy achieves complete specialization.