Creator: Bryant, John B. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 126 Abstract:
A model is presented in which demand deposits backed by fractional currency reserves and public insurance can be beneficial. The model uses Samuelson's pure consumption-loans model. The case for demand deposits, reserves, and deposit insurance rests on costs of illiquidity and incomplete information. The effect of deposit insurance depends upon how, and at what cost, the government meets its insurer's obligation--something which is not specified in practice. It remains possible that demand deposits and deposit insurance are a distortion, and reserve requirements serve only to limit the size of this distortion.
Keyword: Reserve requirements, Insolvency, Banks, Bank panic, and Bond reserve Subject (JEL): E58 - Monetary policy, central banking, and the supply of money and credit - Central banks and their policies and G21 - Financial institutions and services - Banks ; Other depository institutions ; Micro finance institutions ; Mortgages