Money, financial stability and efficiency
AbstractMost analyses of banking crises assume that banks use real contracts but in practice contracts are nominal. We consider a standard banking model with aggregate return risk, aggregate liquidity risk and idiosyncratic liquidity shocks. With non-contingent nominal deposit contracts, a decentralized banking system can achieve the first-best efficient allocation if the central bank accommodates the demands of the private sector for fiat money. Price level variations allow full sharing of aggregate risks. An interbank market allows the sharing of idiosyncratic liquidity risk. In contrast, idiosyncratic (bank-specific) return risks cannot be shared using monetary policy alone as real transfers are needed.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Theory.
Volume (Year): 149 (2014)
Issue (Month): C ()
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Web page: http://www.elsevier.com/locate/inca/622869
Central bank; Commercial banks; Risk sharing;
Other versions of this item:
- Franklin Allen & Elena Carletti & Douglas Gale, 2011. "Money, Financial Stability and Efficiency," Economics Working Papers ECO2011/04, European University Institute.
- Allen, Franklin & Carletti, Elena & Gale, Douglas M, 2011. "Money, Financial Stability and Efficiency," CEPR Discussion Papers 8553, C.E.P.R. Discussion Papers.
- ALLEN, Franklin & CARLETTI, Elena & GALE, Douglas, 2012. "Money, Financial Stability and Efficiency," Economics Working Papers ECO2012/16, European University Institute.
- G01 - Financial Economics - - General - - - Financial Crises
- 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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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Money, Financial Stability and Efficiency
by Christian Zimmermann in NEP-DGE blog on 2011-04-02 17:06:00
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