Risky Collateral and Deposit Insurance

Narayana R. Kocherlakota
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Narayana R. Kocherlakota: University of Minnesota and Federal Reserve Bank of Minneapolis

The B.E. Journal of Macroeconomics, 2001, vol. advances.1, issue 1

Abstract: This paper provides a new rationalization for deposit insurance and systemic disintermediations. I consider an environment in which borrowers face no penalty for failing to repay obligations except the loss of their collateral. I assume that this collateral has aggregate risk. For a subset of the exogenous parameters, I demonstrate that an optimal arrangement features deposit insurance. For a strictly smaller set of parameters, it is optimal in some states of the world to have systemic distintermediations and concomitant falls in real output.

Keywords: collateral; deposit insurance; optimal contracts (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2001
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Persistent link: http://EconPapers.repec.org/RePEc:bpj:bejmac:v:advances.1:y:2001:i:1:n:2

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