Liquidity Provision and Banking Crises with Heterogeneous Agents

Matías Fontenla

No 976, 2007 Meeting Papers from Society for Economic Dynamics

Abstract: Incentive compatibility constraints that produce contracts where short-term funds choose not to deposit will prevent banking crises, but at the cost of losing the insurance function of banks. Restricting short-term deposits may not be optimal at all times, since the cost of doing so may be greater than the expected loss in allowing crises to occur with positive probability.

Date: 2007
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Journal Article: LIQUIDITY PROVISION AND BANKING CRISES WITH HETEROGENEOUS AGENTS (2009)
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