Creator: Wallace, Neil Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 370 Abstract:
The Diamond-Dybvig model of banking (Journal of Political Economy, 1983) is amended by introducing communication barriers—these being implicit in their model and in most explanations of why people hold so-called liquid assets. These barriers imply the sequential-service constraint that Diamond and Dybvig imposed on private intermediation and have other implications: infeasibility of the policy that Diamond and Dybvig identify with deposit insurance and desirability of dependence of the realized return on deposits on the random order of withdrawals.
Keyword: Communication barrier, Sequential service constraint, Dybvig, Diamond, Deposit insurance, Liquid assets, and Banks Subject (JEL): G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages