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Banking crises and liquidity in a monetary economy

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  • Matsuoka, Tarishi
  • Watanabe, Makoto

Abstract

This study investigates banks’ liquidity provision using the Lagos and Wright model of monetary exchange. With aggregate uncertainty, we show that banks sometimes exhaust their cash reserves and fail to satisfy their depositors’ needs for consumption smoothing. We also show that banking crises can be eliminated by a rate-of-return-equalizing policy under perfect risk sharing, but the first-best outcome can be only achieved with the Friedman rule. These results cannot be obtained with other monetary models (e.g., overlapping generations models). We also derive a rich array of non-trivial effects of inflation on equilibrium deposits, the probability of banking crises, and banks’ portfolios.

Suggested Citation

  • Matsuoka, Tarishi & Watanabe, Makoto, 2019. "Banking crises and liquidity in a monetary economy," Journal of Economic Dynamics and Control, Elsevier, vol. 108(C).
  • Handle: RePEc:eee:dyncon:v:108:y:2019:i:c:s0165188919301241
    DOI: 10.1016/j.jedc.2019.103724
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    1. Lunbi Wu, 2020. "Can Liquidity Constraints Explain the Differences of Growth Across Countries?," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 10(4), pages 1-6.

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    More about this item

    Keywords

    Money search; Monetary equilibrium; Banking crisis; Liquidity;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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