Abstract
The recent literature on bank runs, following Diamond and Dybvig (1983), studies the banking sector in isolation from the greater economy. Here we model an economy that includes not only DD type bank depositors but also producers of goods. This multi-sector model improves social welfare in three ways: Asset diversification creates a welfare improvement for all agents. Value is created through exchange as deposits may be traded for real goods. Exchange improves bank solvency which reduces the probability of a bank run. These results are consistent with historical evidence from the U.S. banking system.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
