Diamond–Dybvig and beyond: On the instability of banking
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BORIS DOI
Date of Publication
May 2023
Publication Type
Article
Division/Institute
Author
Gu, Chao | |
Nosal, Ed | |
Wright, Randall |
Subject(s)
Series
European economic review
ISSN or ISBN (if monograph)
0014-2921
Publisher
Elsevier
Language
English
Publisher DOI
Description
Are financial intermediaries – in particular, banks – inherently unstable or fragile, and if so, why? We address this theoretically by analyzing whether model economies with financial intermediation are more prone than those without it to multiple, cyclic, or stochastic equilibria. Several formalizations are considered: Insurance-based banking; models with reputational considerations; those with fixed costs and delegated investment; and those where bank liabilities serve as payment instruments. Importantly for the issue at hand, in each case banking arrangements arise endogenously. While the economics and mathematics differ across specifications, they all predict that financial intermediation engenders instability in a precise sense.
File(s)
File | File Type | Format | Size | License | Publisher/Copright statement | Content | |
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1-s2.0-S0014292123000430-main.pdf | text | Adobe PDF | 1.48 MB | publisher | published |