Liquidity Provision and Banking Crises with Heterogeneous Agents
Incentive compatibility constraints that produce contracts where short-term funds choose not to deposit will prevent banking crises, but at the cost of losing the insurance function of banks. Restricting short-term deposits may not be optimal at all times, since the cost of doing so may be greater than the expected loss in allowing crises to occur with positive probability.
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| Date of creation: | 2007 |
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| Handle: | RePEc:red:sed007:976 |
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03-01, Federal Reserve Bank of Richmond.
- Ennis, Huberto M. & Keister, Todd, 2003. "Economic growth, liquidity, and bank runs," Journal of Economic Theory, Elsevier, vol. 109(2), pages 220-245, April.
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