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On the Instability of Banking and Other Financial Intermediation

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Abstract

Are financial intermediaries inherently unstable? If so, why? What does this suggest about government intervention? To address these issues we analyze whether model economies with financial intermediation are particularly prone to multiple, cyclic, or stochastic equilibria. Four formalizations are considered: a dynamic version of Diamond-Dybvig banking incorporating reputational considerations; a model with delegated investment as in Diamond; one with bank liabilities serving as payment instruments similar to currency in Lagos- Wright; and one with Rubinstein-Wolinsky intermediaries in a decentralized asset market as in Duffie et al. In each case we find, for different reasons, financial intermediation engenders instability in a precise sense.

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  • Chao Gu & Cyril Monnet & Ed Nosal & Randall Wright, 2019. "On the Instability of Banking and Other Financial Intermediation," Working Papers 19.04, Swiss National Bank, Study Center Gerzensee.
  • Handle: RePEc:szg:worpap:1904
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    1. On the Instability of Banking and Other Financial Intermediation
      by Christian Zimmermann in NEP-DGE blog on 2019-07-08 18:29:12

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    Cited by:

    1. Altermatt, Lukas & Wang, Zijian, 2021. "Oligopoly Banking, Risky Investment, and Monetary Policy," Economics Discussion Papers 30728, University of Essex, Department of Economics.

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    More about this item

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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