On the Instability of Banking and other Financial Intermediation

Gu, Chao; Monnet, Cyril; Nosal, Ed; Wright, Randall (May 2019). On the Instability of Banking and other Financial Intermediation (Discussion Papers 19-02). Bern: Department of Economics and Study Center of Gerzensee

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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 banking incorporating reputational considerations; a model with delegated investment 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 Du¢ e et al. In each case we find, for different reasons, financial intermediation engenders instability in a precise sense.

Item Type:

Working Paper

Division/Institute:

03 Faculty of Business, Economics and Social Sciences > Department of Economics

UniBE Contributor:

Monnet, Cyril and Wright, Randall Douglas

Subjects:

300 Social sciences, sociology & anthropology > 330 Economics

Series:

Discussion Papers

Publisher:

Department of Economics and Study Center of Gerzensee

Language:

English

Submitter:

Lars Tschannen

Date Deposited:

03 Sep 2020 08:39

Last Modified:

03 Sep 2020 08:39

JEL Classification:

D02, E02, E44, G21

BORIS DOI:

10.7892/boris.145888

URI:

https://boris.unibe.ch/id/eprint/145888

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