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Banking Panics and Liquidity in a Monetary Economy

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  • Tarishi Matsuoka

    (Tokyo Metropolitan University)

  • Makoto Watanabe

    (VU Amsterdam; Tinbergen Institute, The Netherlands)

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.

Suggested Citation

  • Tarishi Matsuoka & Makoto Watanabe, 2017. "Banking Panics and Liquidity in a Monetary Economy," Tinbergen Institute Discussion Papers 17-091/VII, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20170091
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    Cited by:

    1. Makoto (M.) Watanabe & Tarishi Matsuoka, 2019. "Banking Panics and the Lender of Last Resort in a Monetary Economy," Tinbergen Institute Discussion Papers 19-002/V, Tinbergen Institute.
    2. Lunbi Wu, 2020. "Can Liquidity Constraints Explain the Differences of Growth Across Countries?," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 10(4), pages 1-6.

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    More about this item

    Keywords

    Money Search; Monetary Equilibrium; Banking panics; Liquidity;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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