A BEJM Advances article.

Abstract

This paper provides a new rationalization for deposit insurance and systemic disintermediations. I consider an environment in which borrowers face no penalty for failing to repay obligations except the loss of their collateral. I assume that this collateral has aggregate risk. For a subset of the exogenous parameters, I demonstrate that an optimal arrangement features deposit insurance. For a strictly smaller set of parameters, it is optimal in some states of the world to have systemic distintermediations and concomitant falls in real output.

Originally published in Advances in Macroeconomics.

Recommended Citation

Kocherlakota, Narayana R. (2001) "Risky Collateral and Deposit Insurance," Advances in Macroeconomics: Vol. 1 : Iss. 1, Article 2.
Available at: http://www.bepress.com/bejm/advances/vol1/iss1/art2