  This paper develops a dynamic monetary 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 that equilibrium is more prone
to exhibit endogenous cyclic, chaotic, and stochastic dynamics under lower
reserve requirements, although it can increase consumption in the steady-state.
Introducing endogenous unsecured credit to the baseline model does not change
the main results. The calibrated exercise suggests that this channel could be
another source of economic fluctuations. This paper also provides empirical
evidence that is consistent with the prediction of the model.
