High interest rates: the golden rule for bank stability in the Diamond-Dybvig model
AbstractIn a companion paper, Bertolai et al. (2011) build on Peck-Shell (2003) economies and obtain strong implementation in perturbations of optimal contracts. Since bank runs are eliminated with distortions that become very small when the population grows, a pressing issue is whether an alternative specification can generate the costly crisis that are common in history. We find, in this paper, an affirmative answer in the context of the Diamond-Dybvig (1983) model, and uncover the role played by societal weights on future consumption and solvency risk. An extension of the Ennis-Keister (2009) algorithm shows the impact of run strategies and implicit rates of interest on the formation of expectations, in line with some classical views.
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Bibliographic InfoPaper provided by Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto in its series Working Papers with number 14-2011.
Date of creation: 11 May 2011
Date of revision:
severe aggregate-uncertainty; mixed-strategy bank runs; Insolvency; dynamic programmin;
Find related papers by JEL classification:
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
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