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Suspension of Convertibility versus Deposit Insurance: A Welfare Comparison

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  • Margarita Samartín

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 afinancial intermediary in the economy, who offers risk-sharing contracts toliquidity seeking individuals. In this framework, both informationinduced anpure 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 randomizationin 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. JEL classification codes: G21, G28.

Suggested Citation

  • Margarita Samartín, 2002. "Suspension of Convertibility versus Deposit Insurance: A Welfare Comparison," Review of Finance, European Finance Association, vol. 6(2), pages 223-244.
    • Handle: RePEc:oup:revfin:v:6:y:2002:i:2:p:223-244.
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    File URL: http://hdl.handle.net/10.1023/A:1020147632508
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    Cited by:

    1. Hugo Rodríguez Mendizábal, 2020. "Narrow Banking with Modern Depository Institutions: Is There a Reason to Panic?," International Journal of Central Banking, International Journal of Central Banking, vol. 16(4), pages 145-197, September.

    More about this item

    JEL classification:

    • 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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