Risky Collateral and Deposit Insurance

Narayana Kocherlakota

The B.E. Journal of Macroeconomics, 2001, vol. 1, issue 1, 20

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)
Date: 2001
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Citations: View citations in EconPapers (22)

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DOI: 10.2202/1534-6013.1002

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