High interest rates: the golden rule for bank stability in the Diamond-Dybvig model
In 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.
|Date of creation:||11 May 2011|
|Date of revision:|
|Contact details of provider:|| Postal: Avenida dos Bandeirantes, 3900 Ribeirão Preto - SP|
Phone: (016) 633-5617
Fax: (016) 633-6133
Web page: http://www.cpq.fearp.usp.br/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ennis, Huberto M. & Keister, Todd, 2009. "Run equilibria in the Green-Lin model of financial intermediation," Journal of Economic Theory, Elsevier, vol. 144(5), pages 1996-2020, September.
- James Peck & Karl Shell, 2003.
"Equilibrium Bank Runs,"
Journal of Political Economy,
University of Chicago Press, vol. 111(1), pages 103-123, February.
- Andolfatto, David & Nosal, Ed & Wallace, Neil, 2007.
"The role of independence in the Green-Lin Diamond-Dybvig model,"
Journal of Economic Theory,
Elsevier, vol. 137(1), pages 709-715, November.
- David Andolfatto & Ed Nosal & Neil Wallace, 2006. "The role of independence in the Green-Lin Diamond-Dybvig model," Working Paper 0615, Federal Reserve Bank of Cleveland.
- Diamond, Douglas W & Dybvig, Philip H, 1983.
"Bank Runs, Deposit Insurance, and Liquidity,"
Journal of Political Economy,
University of Chicago Press, vol. 91(3), pages 401-19, June.
- Cavalcanti, Ricardo de Oliveira & Monteiro, Paulo Klinger, 2011. "Enriching information to prevent bank runs," Economics Working Papers (Ensaios Economicos da EPGE) 721, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
- Cavalcanti, Ricardo de Oliveira & Bertolai, Jefferson Donizeti Pereira & Monteiro, Paulo Klinger, 2011. "A note on convergence of Peck-Shell and Green-Lin mechanisms in the Diamond-Dybvig model," Economics Working Papers (Ensaios Economicos da EPGE) 722, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
When requesting a correction, please mention this item's handle: RePEc:fea:wpaper:14-2011. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bruno Vizona Liberato)
If references are entirely missing, you can add them using this form.