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Liquidity Creation without Bank Panics and Deposit Insurance

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  • Juha-Pekka Niinimäki

Abstract

This paper develops a panic-free bank system in an OLG model. A bank issues both demand deposits and time deposits (or bank stocks) so that the maturity-matching constraint is satisfied. The agents who cannot participate in capital markets put their savings in demand deposits; others favour marketable time deposits. Everyone receives a liquid saving asset, and the bank boosts the liquidity of the economy, even though it operates under maturity matching. The costs of stabilization are high if the bank's operating costs are substantial or if there are only a few agents who will participate in the capital markets without subsidies.

Suggested Citation

  • Juha-Pekka Niinimäki, 2010. "Liquidity Creation without Bank Panics and Deposit Insurance," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 166(3), pages 521-547, September.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201009)166:3_521:lcwbpa_2.0.tx_2-y
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    References listed on IDEAS

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    1. Diamond, Douglas W, 1997. "Liquidity, Banks, and Markets," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 928-956, October.
    2. Sudipto Bhattacharya & Paolo Fulghieri & Riccardo Rovelli, 1998. "Financial Intermediation Versus Stock Markets in a Dynamic Intertemporal Model," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 154(1), pages 291-291, March.
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    4. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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