Banking Panics and Liquidity in a Monetary Economy

41 Pages Posted: 9 Jan 2018

See all articles by Tarishi Matsuoka

Tarishi Matsuoka

Tokyo Metropolitan University

Makoto Watanabe

Vrije Universiteit Amsterdam, School of Business and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 09, 2017

Abstract

This paper studies banks’ liquidity provision in the Lagos and Wright model of monetary exchanges. With aggregate uncertainty we show that banks sometimes exhaust their cash reserves and fail to satisfy their depositors’ need of consumption smoothing. The banking panics can be eliminated by the zero-interest policy for the perfect risk sharing, but the first best can be achieved only at the Friedman rule. In our monetary equilibrium, the probability of banking panics is endogenous and increases with inflation, as is consistent with empirical evidence. The model derives a rich array of non-trivial effects of inflation on the equilibrium deposit and the bank’s portfolio.

Keywords: money search, monetary equilibrium, banking panic, liquidity

JEL Classification: E400

Suggested Citation

Matsuoka, Tarishi and Watanabe, Makoto, Banking Panics and Liquidity in a Monetary Economy (November 09, 2017). CESifo Working Paper Series No. 6722, Available at SSRN: https://ssrn.com/abstract=3098301 or http://dx.doi.org/10.2139/ssrn.3098301

Tarishi Matsuoka

Tokyo Metropolitan University ( email )

1-1 Minami Ohsawa, Hachioji-shi
Tokyo 192-0397
United States

Makoto Watanabe (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
60
Abstract Views
408
Rank
469,563
PlumX Metrics