Deposit Insurance and Bank Regulation in a Monetary Economy: A General Equilibrium Exposition

John H. Boyd (), Chun Chang () and Bruce Smith
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John H. Boyd: University of Minnesota
Chun Chang: University of Minnesota and CCFR

A chapter in Recent Developments on Money and Finance, 2006, pp 11-38 from Springer

Abstract: Summary It is commonly argued that poorly designed banking system safety nets are largely to blame for the frequency and severity of modern banking crises. For example, “underpriced” deposit insurance and/or low reserve requirements are often viewed as factors that encourage risk-taking by banks. In this paper, we study the effects of three policy variables: deposit insurance premia, reserve requirements and the way in which the costs of bank bailouts are financed. We show that when deposit insurance premia are low, the monetization of bank bailout costs may not be more inflationary than financing these costs out of general revenue. This is because, while monetizing the costs increases the inflation tax rate, higher levels of general taxation reduce savings, deposits, bank reserves, and the inflation tax base. Increasing the inflation tax rate obviously raises inflation, but so does an erosion of the inflation tax base. We also find that low deposit insurance premia or low reserve requirements may not be associated with a high rate of bank failure.

Keywords: Banking System; Deposit Insurance; Bank Regulation; Steady State Equilibrium; Bank Failure (search for similar items in EconPapers)
Date: 2006
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Journal Article: Deposit insurance and bank regulation in a monetary economy: a general equilibrium exposition (2004)
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DOI: 10.1007/3-540-29500-3_2

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