Banknotes And Economic Growth

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Abstract

Modern paper currency contributes little to productive investment. This shortcoming is not inherent to paper money. It stems from the fact that currency today is monopolistically supplied by public monetary authorities that are poor intermediaries. Commercial banknotes may, in contrast, support efficient intermediation, just as private bank deposits do. We demonstrate this advantage in an endogenous growth model, and use the model to simulate, for a sample of developing countries, steady-state growth-rate gains from various degrees of banknote deregulation. The simulated gains are generally large compared with those from conventional forms of financial liberalization.

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