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Banking and Inside Money: Revisiting the Efficiency of Deposit Contracts

Author

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  • David Rivero
  • Hugo Rodríguez Mendizábal

Abstract

In this paper we show that nominal demand-deposits are not, in general, Pareto optimal contracts. We construct a variation of the Diamond and Dybvig [1983] model where inside money is essential. In this setting, we show that the interplay between non-contingent deposit contracts and price flexibility is not a sufficient mechanism to provide efficient risk-sharing. Furthermore, state-contingent deposit contracts are not incentive compatible and implementing them would require banks to gather specific information regarding customer preferences that is beyond the scope of current depository institutions.

Suggested Citation

  • David Rivero & Hugo Rodríguez Mendizábal, 2021. "Banking and Inside Money: Revisiting the Efficiency of Deposit Contracts," Working Papers 1265, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:1265
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    deposit contracts; risk-sharing; money creation; state contingencies;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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