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Banking with nominal deposits and inside money

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Author Info
Skeie, David R.

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Abstract

Bank runs in the literature take the form of withdrawals of demand deposits payable in real goods, which deplete a fixed reserve of goods in the banking system. That framework describes traditional bank runs based on currency withdrawals as occurred historically in the US and more recently in developing countries. However, in a modern banking system, large withdrawals typically take the form of electronic payments of inside money, with no analog of a depletion of a scarce reserve from the banking system. In a new framework of nominal demand deposits repayable in inside money, pure liquidity-driven bank runs do not occur. If there were excessive early withdrawals, nominal deposits would hedge the bank and flexible monetary prices in the goods market would limit real consumption. The maturity mismatch of short term liabilities and long term assets is not sufficient for multiple equilibria bank runs without other frictions. A key role of the bank is to ensure optimal real liquidity, which allows markets to optimally distribute consumption goods through the price mechanism.

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Publisher Info
Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 17 (2008)
Issue (Month): 4 (October)
Pages: 562-584
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Handle: RePEc:eee:jfinin:v:17:y:2008:i:4:p:562-584

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Web page: http://www.elsevier.com/locate/inca/622875

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Keywords: Bank runs Inside money Nominal contracts Demand deposits;

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Xavier Freixas & Antoine Martin & David Skeie, 2009. "Bank liquidity, interbank markets, and monetary policy," Staff Reports 371, Federal Reserve Bank of New York. [Downloadable!]
  2. Falko Fecht & Antoine Martin, 2009. "Banks, markets, and efficiency," Annals of Finance, Springer, vol. 5(2), pages 131-160, March. [Downloadable!] (restricted)
    Other versions:
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