TY - JOUR
T1 - Banking crises and liquidity in a monetary economy
AU - Matsuoka, Tarishi
AU - Watanabe, Makoto
PY - 2019/11/1
Y1 - 2019/11/1
N2 - This study investigates banks’ liquidity provision using the Lagos and Wright model of monetary exchange. With aggregate uncertainty, we show that banks sometimes exhaust their cash reserves and fail to satisfy their depositors’ needs for consumption smoothing. We also show that banking crises can be eliminated by a rate-of-return-equalizing policy under perfect risk sharing, but the first-best outcome can be only achieved with the Friedman rule. These results cannot be obtained with other monetary models (e.g., overlapping generations models). We also derive a rich array of non-trivial effects of inflation on equilibrium deposits, the probability of banking crises, and banks’ portfolios.
AB - This study investigates banks’ liquidity provision using the Lagos and Wright model of monetary exchange. With aggregate uncertainty, we show that banks sometimes exhaust their cash reserves and fail to satisfy their depositors’ needs for consumption smoothing. We also show that banking crises can be eliminated by a rate-of-return-equalizing policy under perfect risk sharing, but the first-best outcome can be only achieved with the Friedman rule. These results cannot be obtained with other monetary models (e.g., overlapping generations models). We also derive a rich array of non-trivial effects of inflation on equilibrium deposits, the probability of banking crises, and banks’ portfolios.
KW - Banking crisis
KW - Liquidity
KW - Monetary equilibrium
KW - Money search
UR - http://www.scopus.com/inward/record.url?scp=85072516806&partnerID=8YFLogxK
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U2 - 10.1016/j.jedc.2019.103724
DO - 10.1016/j.jedc.2019.103724
M3 - Article
AN - SCOPUS:85072516806
SN - 0165-1889
VL - 108
SP - 1
EP - 22
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
M1 - 103724
ER -