Title: The Broad Consequences of Narrow Banking,
Abstract: We investigate the macroeconomic consequences of narrow banking in the
context of stock-flow consistent models. We begin with an extension of the
Goodwin-Keen model incorporating time deposits, government bills, cash, and
central bank reserves to the base model with loans and demand deposits and use
it to describe a fractional reserve banking system. We then characterize narrow
banking by a full reserve requirement on demand deposits and describe the
resulting separation between the payment system and lending functions of the
resulting banking sector. By way of numerical examples, we explore the
properties of fractional and full reserve versions of the model and compare
their asymptotic properties. We find that narrow banking does not lead to any
loss in economic growth when the models converge to a finite equilibrium, while
allowing for more direct monitoring and prevention of financial breakdowns in
the case of explosive asymptotic behaviour.