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The term-structure of investment and the banks' insurance function

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  • von Thadden, Ernst-Ludwig

Abstract

The article re-examines the proposition, first formulated by Bryant (1980) and Diamond and Dybcvig ( 1983), that in a production economy with stochastic liquidity shocks to the household sector, banks serve to provide optimal intertemporal insurance to consumers. The paper argues that in order to understand the moral hazard problems inherent in this insurance problem, it is too narrow to consider solely the role of banks as providers of liquidity. The paper develops a model with several investment opportunities in which banks have the additional function of asset diversification.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 41 (1997)
Issue (Month): 7 (July)
Pages: 1355-1374

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Handle: RePEc:eee:eecrev:v:41:y:1997:i:7:p:1355-1374

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Web page: http://www.elsevier.com/locate/eer

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Cited by:
  1. Ernst-Ludwig VON THADDEN, 1998. "Liquidity Creation through Banks and Markets : Multiple Insurance and Limited Market Access," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9820, Université de Lausanne, Faculté des HEC, DEEP.
  2. Matias Fontenla, 2004. "Banks and Capital Inflows," Econometric Society 2004 Latin American Meetings 272, Econometric Society.
  3. Falko Fecht & Antoine Martin, 2005. "Banks, Markets, and Efficiency," Finance 0507017, EconWPA.
  4. Alexander Zimper, 2011. "Optimal liquidity provision through a demand deposit scheme: The Jacklin critique revisited," Working Papers 208, Economic Research Southern Africa.
  5. Gersbachd, Hans, 1998. "Liquidity Creation, Efficiency, and Free Banking," Journal of Financial Intermediation, Elsevier, vol. 7(1), pages 91-118, January.
  6. Jochen Güntner, 2013. "The federal funds market, excess reserves, and unconventional monetary policy," Economics working papers 2013-12, Department of Economics, Johannes Kepler University Linz, Austria.

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