Bank Runs, Deposit Insurance, and Liquidity

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Bank Runs, Deposit Insurance, and Liquidity (2000)

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by Douglas W. Diamond , Philip H. Dybvig

Venue:	Journal of Political Economy
Citations:	1172 - 13 self

BibTeX

@ARTICLE{Diamond00bankruns,,
    author = {Douglas W. Diamond and Philip H. Dybvig},
    title = {Bank Runs, Deposit Insurance, and Liquidity},
    journal = {Journal of Political Economy},
    year = {2000},
    volume = {91},
    pages = {401--419}
}

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Abstract

This article develops a model which shows that bank deposit contracts can provide allocations superior to those of exchange markets, offering an explanation of how banks subject to runs can attract deposits. Investors face privately observed risks which lead to a demand for liquidity. Traditional demand deposit contracts which provide liquidity have multiple equilibria, one of which is a bank run. Bank runs in the model cause real economic damage, rather than simply reflecting other problems. Contracts which can prevent runs are studied, and the analysis shows that there are circumstances when government provision of deposit insurance can produce superior contracts. This article is reprinted from the Journal of Political Economy (June 1983, vol. 91, no. 3, pp. 401--19) with the permission of the University of Chicago Press. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. ...

Keyphrases

bank run deposit insurance traditional demand deposit contract government provision federal reserve bank bank deposit contract chicago press superior contract federal reserve system political economy exchange market model cause real economic damage

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