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Banks’ liquidity provision and panic runs with recursive preferences

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  • Panetti, Ettore

Abstract

How important is it to distinguish relative risk aversion (RRA) from the intertemporal elasticity of substitution (IES) to study banks’ provision of liquidity insurance and the effectiveness of deposit freezes against depositors’ panic runs? To answer these questions, I develop a Diamond–Dybvig model of banking in which depositors feature recursive preferences. In equilibrium, banks provide liquidity insurance, and a time-consistent deposit freeze prevents panic runs, only if depositors’ preferences for an early resolution of uncertainty are sufficiently strong, i.e. if RRA is sufficiently larger than the inverse of IES.

Suggested Citation

  • Panetti, Ettore, 2022. "Banks’ liquidity provision and panic runs with recursive preferences," Finance Research Letters, Elsevier, vol. 47(PA).
    • Handle: RePEc:eee:finlet:v:47:y:2022:i:pa:s1544612321005912
    DOI: 10.1016/j.frl.2021.102661
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial intermediation; Bank runs; Recursive preferences; Relative risk aversion; Intertemporal elasticity of substitution;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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