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The Term-Structure of Investment and the Banks' Insurance Function

Author

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  • Ernst-Ludwig VON THADDEN

Abstract

The article re-examines the proposition, first formulated by Bryant (1980) and Diamond and Dybcvig ( 1983), that in a production economy with stochastic liquidity shocks to the household sector, banks serve to provide optimal intertemporal insurance to consumers. The paper argues that in order to understand the moral hazard problems inherent in this insurance problem, it is too narrow to consider solely the role of banks as providers of liquidity. The paper develops a model with several investment opportunities in which banks have the additional function of asset diversification.

Suggested Citation

  • Ernst-Ludwig VON THADDEN, 1996. "The Term-Structure of Investment and the Banks' Insurance Function," Cahiers de Recherches Economiques du Département d'économie 9606, Université de Lausanne, Faculté des HEC, Département d’économie.
    • Handle: RePEc:lau:crdeep:9606
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    Cited by:

    1. Güntner, Jochen H.F., 2015. "The federal funds market, excess reserves, and unconventional monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 53(C), pages 225-250.
    2. Falko Fecht & Antoine Martin, 2009. "Banks, markets, and efficiency," Annals of Finance, Springer, vol. 5(2), pages 131-160, March.
    3. repec:rza:wpaper:208 is not listed on IDEAS
    4. Zhang, Yu, 2017. "Asset price volatility and banks," Journal of Mathematical Economics, Elsevier, vol. 71(C), pages 96-103.
    5. Simas Kucinskas, 2015. "Liquidity Creation without Banks," Tinbergen Institute Discussion Papers 15-101/VI, Tinbergen Institute.
    6. Gersbachd, Hans, 1998. "Liquidity Creation, Efficiency, and Free Banking," Journal of Financial Intermediation, Elsevier, vol. 7(1), pages 91-118, January.
    7. Matias Fontenla, 2004. "Banks and Capital Inflows," Econometric Society 2004 Latin American Meetings 272, Econometric Society.
    8. von Thadden, Ernst-Ludwig, 1999. "Liquidity creation through banks and markets: Multiple insurance and limited market access," European Economic Review, Elsevier, vol. 43(4-6), pages 991-1006, April.
    9. Zimper Alexander, 2013. "Optimal Liquidity Provision Through a Demand Deposit Scheme: The Jacklin Critique Revisited," German Economic Review, De Gruyter, vol. 14(1), pages 89-107, February.

    More about this item

    Keywords

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    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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