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Private money and bank runs

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  • Hongfei Sun
  • Stella Huangfu

Abstract

This paper studies bank runs in a model with private money. We show that allowing claims on demand deposits to circulate as a medium of exchange can help prevent bank runs. In our model, there exists a unique banking equilibrium where no one demands early withdrawals of real goods and agents in need of liquidity use private money to finance consumption. With private money, the unique equilibrium not only eliminates bank runs but also improves banking efficiency. The implications of our model are consistent with the evidence from the banking history of the United States.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 44 (2011)
Issue (Month): 3 (August)
Pages: 859-879

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Handle: RePEc:cje:issued:v:44:y:2011:i:3:p:859-879

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  1. Champ, B. & Snith, B.D. & Williamson, D.S., 1991. "Currency Elasticity and Banking Panics: Theory and Evidence," RCER Working Papers 292, University of Rochester - Center for Economic Research (RCER).
  2. Shouyong Shi, 1996. "A Divisible Search Model of Fiat Money," Working Papers 930, Queen's University, Department of Economics.
  3. Ricardo Lagos & Randall Wright, 2004. "A unified framework for monetary theory and policy analysis," Staff Report 346, Federal Reserve Bank of Minneapolis.
  4. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  5. Kocherlakota, Narayana R., 2003. "Societal benefits of illiquid bonds," Journal of Economic Theory, Elsevier, vol. 108(2), pages 179-193, February.
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Cited by:
  1. Daniel Sanches, 2013. "On the welfare properties of fractional reserve banking," Working Papers 13-32, Federal Reserve Bank of Philadelphia, revised 04 Feb 2013.
  2. Daniel R. Sanches, 2013. "Banking crises and the role of bank coalitions," Working Papers 13-28, Federal Reserve Bank of Philadelphia, revised 04 Feb 2014.

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