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Deposit insurance and financial integration in the Eurozone: A DSGE model

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  • Dubois, Corinne

Abstract

The financial and Eurozone debt crises highlighted the importance of deposit insurance coordination in the Eurozone. While the role of deposit insurance in protecting the economy from harmful runs is widely accepted, little is known about the international implications of deposit insurance, and in particular how it affects the cross-border transmission of shocks. This paper proposes a macroeconomic framework to evaluate different deposit insurance regimes in the Eurozone. I develop an international DSGE model with banks that are subject to endogenous and costly runs. The model sheds light on a new transmission channel: a weak deposit insurance in one country generates financial instability in that country, which in turn spills over to the rest of the union due to financial integration. The analysis shows that harmonizing deposit insurance in the Eurozone significantly improves financial stability and welfare both in the Core and Periphery regions.

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  • Dubois, Corinne, 2021. "Deposit insurance and financial integration in the Eurozone: A DSGE model," Economics Letters, Elsevier, vol. 207(C).
    • Handle: RePEc:eee:ecolet:v:207:y:2021:i:c:s0165176521003098
    DOI: 10.1016/j.econlet.2021.110032
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    References listed on IDEAS

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    Cited by:

    1. Gómez Fernández-Aguado, Pilar & Partal Ureña, Antonio & Trigo Martínez, Eduardo, 2024. "Risk contribution to deposit insurance: Evidence from commercial and cooperative banks in the Eurozone," Economic Analysis and Policy, Elsevier, vol. 81(C), pages 341-355.

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    More about this item

    Keywords

    DSGE model; International economics; Financial economics; Financial stability; Banking;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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