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Liquidity Provision and Banking Crises with Heterogeneous Agents

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  • Matias Fontenla

    (University of New Mexico)

Abstract

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.

Suggested Citation

  • Matias Fontenla, 2007. "Liquidity Provision and Banking Crises with Heterogeneous Agents," 2007 Meeting Papers 976, Society for Economic Dynamics.
    • Handle: RePEc:red:sed007:976
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    References listed on IDEAS

    as
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    7. Bruce D. Smith, 2002. "Monetary Policy, Banking Crises, and the Friedman Rule," American Economic Review, American Economic Association, vol. 92(2), pages 128-134, May.
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