Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/172998
Authors: 
Matsuoka, Tarishi
Watanabe, Makoto
Year of Publication: 
2017
Series/Report no.: 
CESifo Working Paper 6722
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.
Subjects: 
money search
monetary equilibrium
banking panic
liquidity
JEL: 
E40
Document Type: 
Working Paper

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