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Contagious bank failures in a free banking system

  • Aghion, Philippe
  • Bolton, Patrick
  • Dewatripont, Mathias

This paper develops a model of an unregulated banking system based around a private clearing house arrangement. Whilst such a system may dominate one with a public safety net in reducing moral hazard in lending and therefore the scope for individual bank insolvency, it also increases the likelihood of contagious bank failures following a systemic shock or an aggregate liquidity shortage.

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File URL: http://dash.harvard.edu/bitstream/handle/1/12490629/Contagious%20Bank%20Failures%20in%20a%20Free%20Banking%20System.pdf
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Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 12490629.

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Date of creation: 2000
Date of revision:
Publication status: Published in European Economic Review
Handle: RePEc:hrv:faseco:12490629
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Web page: http://www.economics.harvard.edu/

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  1. Calomiris, Charles W., 1999. "Building an incentive-compatible safety net," Journal of Banking & Finance, Elsevier, vol. 23(10), pages 1499-1519, October.
  2. 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.
  3. Postlewaite, Andrew & Vives, Xavier, 1987. "Bank Runs as an Equilibrium Phenomenon," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 485-91, June.
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