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Liquidity, Banking, and Bank Failures

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  • Williamson, Stephen D

Abstract

A multiperiod model with risk-neutral agents is constructed in which a liquidity problem arises in an equilibrium with decentralized tradin g in capital, which banking institutions are able to alleviate. Depos it contracts provide for early withdrawal, banks hold debt, and agent s who borrow from banks hold compensating balances. Institutional col lapse, or a state of the world when bank failures are experienced, is associated with a high demand for liquidity, low output, and a lower than average level of welfare. Bank failure is symptomatic of a part icular state of endowments, preferences, and technology, and governme nt intervention is undesirable. Copyright 1988 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Williamson, Stephen D, 1988. "Liquidity, Banking, and Bank Failures," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(1), pages 25-43, February.
  • Handle: RePEc:ier:iecrev:v:29:y:1988:i:1:p:25-43
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    Cited by:

    1. Bougheas, Spiros, 1999. "Contagious bank runs," International Review of Economics & Finance, Elsevier, vol. 8(2), pages 131-146, June.
    2. repec:dgr:rugccs:199917 is not listed on IDEAS
    3. Carmona, Guilherme, 2007. "Bank failures caused by Large withdrawals: An explanation based purely on liquidity," Journal of Mathematical Economics, Elsevier, vol. 43(7-8), pages 818-841, September.
    4. Zuzana Fungacova & Rima Turk & Laurent Weill, 2015. "High Liquidity Creation and Bank Failures," IMF Working Papers 15/103, International Monetary Fund.
    5. Lensink, Robert & Sterken, Elmer, 2001. "Asymmetric information, option to wait to invest and the optimal level of investment," Journal of Public Economics, Elsevier, vol. 79(2), pages 365-374, February.
    6. Semenova, M., 2011. "Bank Runs and Costly Information," Journal of the New Economic Association, New Economic Association, issue 10, pages 31-52.

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