Summary
The paper provides a microeconomic analysis of the overdraft mechanism and works out its macroeconomic implications, which are evaluated in the light of Finnish data. First, a two-asset model of bank behaviour will be formulated and used to explain the appearance of overdrafts. Second, unused overdrafts are seen to be determined by the portfolio behaviour of business firms. A modified money multiplier will be derived to take into account the possibility that the money supply may change when the quantity of unused overdrafts changes. It will also be shown that an increase in the reserve ratio of the banks may have an expansionary impact on money multiplier in an economy with a near inside money system. This stands in sharp contrast to received wisdom.
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The empirical parts of this paper draw heavily on the author's Ph.D. thesisKanniainen [1976] but some new theoretical results are derived. The first draft of the paper was written while I was working at the University of Helsinki as a recipient of a grant from the Research Foundation of the Co-operative Banks. Comments by William Poole are gratefully acknowledged. The responsibility for the views presented remains with the author.
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Kanniainen, V. The role of bank overdrafts in the finnish financial system. Empirical Economics 3, 31–47 (1978). https://doi.org/10.1007/BF01764563
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DOI: https://doi.org/10.1007/BF01764563