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The Dynamics of Deposit Insurance and the Consumption Trap Author info | Abstract | Publisher info | Download info | Related research | Statistics Hans Gersbach ()
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We investigate a banking system subject to repeated macroeconomic shocks and show that without deposit rate control, the banking system collapses with certainty. Any initial level of reserves will delay the collapse but not avoid it. Even without a banking collapse, the economy still converges to a consumption trap with positive probability. Savings are maximal in the consumption trap, but are used entirely to pay back obligations of banks. No long-term investments can be financed and GDP is minimal. We discuss stronger intervention rules that avoid both a collapse and the consumption trap, confirming that capital requirements are an early indicator signaling when intervention may become necessary. Our analysis provides an explanation why economies which experience a banking crisis may endure long-lasting economic downturns.
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number
CESifo Working Paper No. 509.
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Date of creation: 2001Date of revision:
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Keywords: Financial intermediation ; macroeconomic risks ; banking crises ; deposit insurance ; banking regulation ; Find related papers by JEL classification: D41 - Microeconomics - - Market Structure and Pricing - - - Perfect Competition E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General G20 - Financial Economics - - Financial Institutions and Services - - - General
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Hans Gersbach & Jan Wenzelburger, 2004.
"Do Risk Premia Protect from Banking Crises ,"
Levine's Bibliography
122247000000000356, UCLA Department of Economics.
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