Publication: Suspension of convertibility versus deposit insurance: a welfare comparison
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ISSN: 1573-692X (Online)
ISSN: 1572-3097 (Print)
Publication date
2002
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Oxford University Press
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Abstract
This paper introduces risk-averse preferences in Chari and Jagannathan (1988). A first motivation for this extension is to give a positive role for a financial intermediary in the economy, who offers risk-sharing contracts to liquidity seeking individuals. In this framework, both information-induced an pure panic runs will occur. The second motivation is to complete Chari and Jagannathan's welfare analysis by comparing suspension of convertibility and deposit insurance, given their relative benefits and costs (of randomization in meeting liquidity needs or deadweight taxation). It is shown that the choice between the two contracts depends on the level of risk aversion, the intertemporal discount factor and the attributes about the underlying technology
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Keywords
Bank runs, Deposit contracts, Deposit insurance, Optimal risk sharing, Suspension of convertibility
Bibliographic citation
European Finance Review, 2002, Vol. 6, No 2, p. 223-244