On the Instability of Banking and Financial Intermediation

Chao Gu, Cyril Monnet, Ed Nosal and Randall Wright

No 352, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: Are fi nancial intermediaries inherently unstable? If so, why? What does this suggest about government intervention? To address these issues we analyze whether model economies with fi nancial intermediation are particularly prone to multiple, cyclic, or stochastic equilibria. Four formalizations are considered: a dynamic version of Diamond-Dybvig incorporating reputational considerations; a model with delegated monitoring as in Diamond; one with bank liabilities serving as payment instruments similar to currency in Lagos-Wright; and one with Rubinstein-Wolinsky intermediaries in a decentralized asset market as in Duffie et al. In each case we fi nd, for different reasons, that fi nancial intermediation engenders instability in a precise sense.

Date: 2019
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
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Citations: View citations in EconPapers (7)

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Working Paper: On the Instability of Banking and Financial Intermediation (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:352

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