Suspension of Convertibility versus Deposit Insurance: A Welfare Comparison

Margarita Samartín

Review of Finance, 2002, vol. 6, issue 2, 223-244

Abstract: This paper introduces risk-averse preferences in Chari and Jagannathan (1988). A first motivation for this extension is to give a positive role for afinancial intermediary in the economy, who offers risk-sharing contracts toliquidity seeking individuals. In this framework, both informationinduced anpure panic runs will occur. The second motivation is to complete Chari and Jagannathan's welfare analysis by comparing suspension of convertibility and deposit insurance, given their relative benefits and costs (of randomizationin meeting liquidity needs or deadweight taxation). It is shown that the choice between the two contracts depends on the level of risk aversion, the intertemporal discount factor and the attributes about the underlying technology. JEL classification codes: G21, G28.

Date: 2002
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