Credit cards and interest rates: theory and institutional factors--a critical view

When the government issues its own nonconvertible currency--also known as a flexible exchange rate policy--the central bank, as monopoly supplier of net reserves to its member banks, is the (exogenous) source of the riskfree yield curve. Furthermore, in the case of government member bank deposit insurance, the banking system is in no case reserve-constrained. In the context of Professor Staufferʹs paper, this renders his entire analysis of available funds and demand for balances inapplicable. Only with a fixed exchange rate regime, such as a gold standard, a currency board, or government "peg" of some sort, are interest rates endogenous and subject to the forces Stauffer alludes to.