On the Instability of Banking and Financial Intermediation

Chao Gu, Cyril Monnet, Ed Nosal and Randall Wright

No 1901, Working Papers from Department of Economics, University of Missouri

Abstract: Are financial intermediaries inherently unstable? If so, why? What does this suggest about government intervention? To address these issues we analyze whether model economies with financial 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 find, for different reasons, that financial intermediation engenders instability in a precise sense.

Keywords: Banking; Financial Intermediation; Instability; Volatility (search for similar items in EconPapers)
JEL-codes: D02 E02 E44 G21 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2019-04-08
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (6)

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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:umc:wpaper:1901

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