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The Term-Structure of Investment and the Banks' Insurance Function

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Author Info

  • Ernst-Ludwig VON THADDEN

Abstract

The article re-examines the proposition, first formulated by Bryant (1980) and Diamond and Dybcvig ( 1983), that in a production economy with stochastic liquidity shocks to the household sector, banks serve to provide optimal intertemporal insurance to consumers. The paper argues that in order to understand the moral hazard problems inherent in this insurance problem, it is too narrow to consider solely the role of banks as providers of liquidity. The paper develops a model with several investment opportunities in which banks have the additional function of asset diversification.

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Bibliographic Info

Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 9606.

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Length: 22 pages
Date of creation: Feb 1996
Date of revision:
Publication status: Published in European Economic Review, vol. 41 (7), July 1997, pp. 1355-1374
Handle: RePEc:lau:crdeep:9606

Contact details of provider:
Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.05
Email:
Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
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Related research

Keywords: banks; intermediation liquidity; maturity transformation; banks runs; incentive compatibility; diversification;

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Cited by:
  1. Gersbachd, Hans, 1998. "Liquidity Creation, Efficiency, and Free Banking," Journal of Financial Intermediation, Elsevier, vol. 7(1), pages 91-118, January.
  2. Jochen Güntner, 2013. "The federal funds market, excess reserves, and unconventional monetary policy," Economics working papers 2013-12, Department of Economics, Johannes Kepler University Linz, Austria.
  3. Matias Fontenla, 2004. "Banks and Capital Inflows," Econometric Society 2004 Latin American Meetings 272, Econometric Society.
  4. Falko Fecht & Antoine Martin, 2009. "Banks, markets, and efficiency," Annals of Finance, Springer, vol. 5(2), pages 131-160, March.
  5. Alexander Zimper, 2011. "Optimal liquidity provision through a demand deposit scheme: The Jacklin critique revisited," Working Papers 208, Economic Research Southern Africa.
  6. von Thadden, Ernst-Ludwig, 1999. "Liquidity creation through banks and markets: Multiple insurance and limited market access," European Economic Review, Elsevier, vol. 43(4-6), pages 991-1006, April.

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