(1) Draft
(2) Slides

This paper develops a dynamic general equilibrium model to study the (in)stability of the fractional reserve banking system. The model shows that the fractional reserve banking system can endanger stability in the sense that equilibrium is more prone to exhibit endogenous cyclic, chaotic, and stochastic dynamics under lower reserve requirements, although it can increase welfare in the steady state. Introducing endogenous unsecured credit to the baseline model does not change the main results. I also provide empirical evidence that is consistent with the prediction of the model.