Money, Financial Stability and Efficiency
AbstractMost analyses of banking crises assume that banks use real contracts. However, in practice contracts are nominal and this is what is assumed here. We consider a standard banking model with aggregate return risk, aggregate liquidity risk and idiosyncratic liquidity shocks. We show that, with non-contingent nominal deposit contracts, the first-best efficient allocation can be achieved in a decentralized banking system. What is required is that the central bank accommodates the demands of the private sector for fiat money. Variations in the price level 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; real transfers are needed.
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Bibliographic InfoPaper provided by European University Institute in its series Economics Working Papers with number ECO2012/16.
Date of creation: 2012
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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.
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-06-25 (All new papers)
- NEP-BAN-2012-06-25 (Banking)
- NEP-CBA-2012-06-25 (Central Banking)
- NEP-MAC-2012-06-25 (Macroeconomics)
- NEP-MON-2012-06-25 (Monetary Economics)
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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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