Money, financial stability and efficiency

Franklin Allen, Elena Carletti () and Douglas Gale ()

Journal of Economic Theory, 2014, vol. 149, issue C, 100-127

Abstract: Most analyses of banking crises assume that banks use real contracts but in practice contracts are nominal. We consider a standard banking model with aggregate return risk, aggregate liquidity risk and idiosyncratic liquidity shocks. With non-contingent nominal deposit contracts, a decentralized banking system can achieve the first-best efficient allocation if the central bank accommodates the demands of the private sector for fiat money. Price level variations allow full sharing of aggregate risks. An interbank market allows the sharing of idiosyncratic liquidity risk. In contrast, idiosyncratic (bank-specific) return risks cannot be shared using monetary policy alone as real transfers are needed.

Keywords: Central bank; Commercial banks; Risk sharing (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (49)

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Related works:
Working Paper: Money, Financial Stability and Efficiency (2012)
Working Paper: Money, Financial Stability and Efficiency (2011)
Working Paper: Money, Financial Stability and Efficiency (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:149:y:2014:i:c:p:100-127

DOI: 10.1016/j.jet.2013.02.002

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