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Private Money And Bank Runs

Hongfei Sun () and Stella Huangfu ()

No 1145, Working Paper from Economics Department, Queen's University

Abstract: This paper studies bank runs in a model with coexistence of fiat money and private money. When fiat money is the only medium of exchange, there exist a bank run equilibrium and an equilibrium that achieves the optimal risk sharing. In contrast, when private money is also a medium of exchange, there exists a unique equilibrium where no one demands early withdrawals of fiat money and agents in need of liquidity only use private money to finance consumption. The unique equilibrium achieves the first-best outcome and eliminates bank runs without having resort to any government intervention.

Keywords: private money; fiat money; bank runs (search for similar items in EconPapers)
JEL-codes: E4 G2 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2007-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

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https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1145.pdf First version 2007 (application/pdf)

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Journal Article: Private money and bank runs (2011) Downloads
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