When are banks better than markets? Comment on Zimper (2013)

Simas Kucinskas

doi:10.1016/j.econlet.2016.06.002

When are banks better than markets? Comment on Zimper (2013)

Simas Kucinskas

Economics

Research output: Contribution to Journal › Article › Academic › peer-review

Abstract

Zimper (2013) claims that in the basic Diamond–Dybvig model trade in a competitive asset market can implement the first best. I show that the argument of Zimper is incorrect as it stands: Zimper derives his result assuming that the consumers choose investment levels that are individually suboptimal. The corrected argument shows that laissez-faire markets do not provide any liquidity insurance. However, if consumers can trade in markets in the banking economy, banks do not provide any insurance either. Whether or not banks are better than markets, therefore, crucially depends on the extent of trading restrictions.

Original language	English
Pages (from-to)	171-173
Number of pages	3
Journal	Economics Letters
Volume	147
DOIs	https://doi.org/10.1016/j.econlet.2016.06.002
Publication status	Published - 1 Oct 2016

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 17 Partnerships for the Goals

Keywords

Asset market
Banks
Competitive equilibrium
Incomplete markets
Liquidity insurance

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10.1016/j.econlet.2016.06.002

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abstract = "Zimper (2013) claims that in the basic Diamond–Dybvig model trade in a competitive asset market can implement the first best. I show that the argument of Zimper is incorrect as it stands: Zimper derives his result assuming that the consumers choose investment levels that are individually suboptimal. The corrected argument shows that laissez-faire markets do not provide any liquidity insurance. However, if consumers can trade in markets in the banking economy, banks do not provide any insurance either. Whether or not banks are better than markets, therefore, crucially depends on the extent of trading restrictions.",

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AB - Zimper (2013) claims that in the basic Diamond–Dybvig model trade in a competitive asset market can implement the first best. I show that the argument of Zimper is incorrect as it stands: Zimper derives his result assuming that the consumers choose investment levels that are individually suboptimal. The corrected argument shows that laissez-faire markets do not provide any liquidity insurance. However, if consumers can trade in markets in the banking economy, banks do not provide any insurance either. Whether or not banks are better than markets, therefore, crucially depends on the extent of trading restrictions.

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KW - Competitive equilibrium

KW - Incomplete markets

KW - Liquidity insurance

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JO - Economics Letters

JF - Economics Letters

ER -

When are banks better than markets? Comment on Zimper (2013)

Abstract

UN SDGs

Keywords

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