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Private Money and Bank Runs

Author

Listed:
  • Hongfei Sun

    () (Queen's University)

  • Xiuhua Huangfu

    () (University of Sydney)

Abstract

This paper studies bank runs in a model with coexistence of fiat money and private money. When fiat money is the only medium of exchange, there exist a bank run equilibrium and an equilibrium that achieves the optimal risk sharing. In contrast, when private money is also a medium of exchange, there exists a unique equilibrium where no one demands early withdrawals of fiat money and agents in need of liquidity only use private money to finance consumption. The unique equilibrium achieves the first-best outcome and eliminates bank runs without having resort to any government intervention.

Suggested Citation

  • Hongfei Sun & Xiuhua Huangfu, 2007. "Private Money and Bank Runs," Working Papers 1145, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:1145
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    File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1145.pdf
    File Function: First version 2007
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    References listed on IDEAS

    as
    1. Kocherlakota, Narayana R., 2003. "Societal benefits of illiquid bonds," Journal of Economic Theory, Elsevier, vol. 108(2), pages 179-193, February.
    2. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    4. Bruce Champ & Bruce D. Smith & Stephen D. Williamson, 1996. "Currency Elasticity and Banking Panics: Theory and Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 828-864, November.
    5. Shouyong Shi, 1997. "A Divisible Search Model of Fiat Money," Econometrica, Econometric Society, vol. 65(1), pages 75-102, January.
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    Citations

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    Cited by:

    1. Chao Gu & Fabrizio Mattesini & Randall Wright, 2013. "Banking: A New Monetarist Approach," Review of Economic Studies, Oxford University Press, vol. 80(2), pages 636-662.
    2. Randall Wright & Cyril Monnet & Fabrizio Mattesini, 2009. "Banking: a mechanism design approach," 2009 Meeting Papers 635, Society for Economic Dynamics.
    3. Daniel R. Sanches, 2013. "Banking crises and the role of bank coalitions," Working Papers 13-28, Federal Reserve Bank of Philadelphia, revised 04 Feb 2014.
    4. Sanches, Daniel, 2013. "On the welfare properties of fractional reserve banking," Working Papers 13-32, Federal Reserve Bank of Philadelphia, revised 04 Feb 2013.
    5. Daniel Sanches, 2016. "On The Welfare Properties Of Fractional Reserve Banking," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57, pages 935-954, August.

    More about this item

    Keywords

    private money; fiat money; bank runs;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G2 - Financial Economics - - Financial Institutions and Services

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