Growth expectations and banking system fragility in developing economies
The likelihood of a banking crisis appears to be higher in fast-developing countries. An explanation is provided in a Diamond and Dybvig framework, where banks are vehicles of consumption-smoothing, offering insurance against shocks to the consumption path of consumers. The theoretical model shows that the higher consumer growth expectations, the higher the optimal level of illiquidity insurance — even if it implies higher exposure bank runs. Empirical evidence supports this result and suggests that the effect of deposit interest rates on the probability of crisis is stronger after a period of high, uniterrupted growth. Policies of providing bail-outs or deposit insurance are demonstrated to be efficient even when they increase the fragility of the banking system.
Year of publication: |
2005-11-07
|
---|---|
Authors: | Proto, Eugenio |
Institutions: | Siirtymätalouksien tutkimuslaitos, Suomen Pankki |
Saved in:
freely available
Saved in favorites
Similar items by person
-
Historical Analysis of National Subjective Wellbeing Using Millions of Digitized Books
Hills, Thomas, (2015)
-
Intelligence, Personality and Gains from Cooperation in Repeated Interactions
Proto, Eugenio, (2016)
-
Are happy workers more productive?
Proto, Eugenio, (2016)
- More ...