Illiquid banks, financial stability, and interest rate policy
By: Douglas W. Diamond, Raghuram Rajan
Contributors: Rajan, Raghuram; National Bureau of Economic Research
Series: NBER working paper series -- working paper 16994; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 16994.
Publisher: National Bureau of Economic Research
Published: 2011
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "Do low interest rates alleviate banking fragility? Banks finance illiquid assets with demandable deposits, which discipline bankers but expose them to damaging runs.  Authorities may choose to bail out banks being run.  Unconstrained bailouts undermine the disciplinary role of deposits.  Moreover, competition forces banks to promise depositors more, increasing intervention and making the system worse off.  By contrast, constrained intervention to lower rates maintains private discipline, while offsetting contractual rigidity.  It may still lead banks to make excessive liquidity promises.  Anticipating this, central banks can reduce financial fragility by raising rates in normal times to offset their propensity to reduce rates in adverse times"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 7/7/2011.

Includes bibliographical references.

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