COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 964

"A Strategic Market Game with a Mutual Bank
with Fractional Reserves and Redemption in Gold
(A Continuum of Traders)"

Martin Shubik and D.P. Tsomocos

December 1990

We utilize the strategic market game approach to analyze the role and function of a mutual bank with variable fractional reserves, redemption in gold and endogenous interest rate formation. We specify the conditions of enough money and its distribution. Using the continuum of traders model, we show existence and optimality for the case of no bankruptcy as well as for the case in which there exists the potentiality of bankruptcy. Finally, we analyze the relationship of the gearing ratio and the bankruptcy penalty with respect to the resulting equilibrium allocations.

Keywords: Banking, interest rates, bankruptcy, credit, money supply

JEL Classification: G33, G21, E51, E43