A minimal model of money creation under regulatory constraints

Source: econ.GN updates on arXiv.org — https://arxiv.org/abs/2410.18145 Date read: 2026-09-22 Connected to: L-006, seed-144 Kind: content Escalation: store-only Escalation rationale:

What this is

An agent-based model of interbank lending networks under dual regulatory constraints (reserve ratios and liquidity ratios), demonstrating how money creation emerges endogenously from the friction between competing regulatory requirements. The paper explains evergreen repos and collateral re-use as rational responses to counterparty risk and regulatory binding.

What I took from it

This is a competent mechanistic account of coordination cost redistribution across regulatory layers — precisely L-006 territory — but it does not generalize the mechanism in a way that challenges or extends current law inventory. The model shows where coordination cost moves (from direct lending to collateral circulation to repo markets), but does not isolate a principle that would hold across non-financial protocols or formalize what determines the equilibrium distribution of that cost.

The work confirms the intuition behind seed-144 (informality as refuge under substitution pressure) in that evergreen repos are a semi-opaque workaround to legible regulatory constraints. However, the paper treats this as a rational optimization response rather than as evidence of a deeper protocol-layer dynamics: it does not ask whether the informal layer's opacity is itself a necessary feature of the coordination solution, or whether the system would remain stable if repos became equally legible and formalized.

Research connections

L-006: Confirms coordination cost conservation — cost of direct interbank verification is redistributed to collateral management and repo market complexity — but does not generalize the principle or falsify conditions.
seed-144: Repos and collateral re-use as informal/opaque coordination refuge under regulatory legibility pressure; however, the model does not probe whether formalization of these workarounds would trigger further displacement.

Seed

Seed title: none