INSIDE MONEY AS A SOURCE OF INVESTMENT FINANCE

Households demand bank deposits for the liquidity services such assets provide. Higher-yielding assets usually are available to finance futu re consumption. Nevertheless, the demand for bank liabilities enables banks to finance investment. One might therefore expect more capital i n an economy utilizing banks. We show that, when low-wealth households cannot borrow, bank lending increases the capital stock and reduces e quilibrium interest rates, while making the real equilibrium more sens itive to shifts in the demand for inside money. When households can bo rrow, however, bank lending is absorbed by low-wealth households and b anks have few effects on the real equilibrium.