Illiquid Banks, Financial Stability, and Interest Rate Policy
Bibliographic Data
| ID | 10175779 |
|---|---|
| Authors | Douglas W Diamond (0000-0002-1625-502X), Raghuram G Rajan (0000-0003-4135-4940) |
| Year | 2012 |
| Volume | 120 |
| Issue | 3 |
| Pages | 552-591 |
| Publication date | 2012-06-01 |
| Peer Reviewed | Yes |
| Open Access | No |
| Type | ARTICLE |
| Venue | Journal of Political Economy (JOURNAL) |
| Journal identifiers | ISSN: 0022-3808 • E-ISSN: 1537-534X |
| Publisher | University of Chicago Press (PUBLISHER • US) |
| DOI | 10.1086/666669 |
| OpenAlex | W2891649014 |
| Language | EN |
| Citations received | 6 |
| References cited | 15 |
Banks finance illiquid assets with demandable deposits, which discipline bankers but expose them to damaging runs. Authorities may not want to stand by and watch banks collapse. However, unconstrained direct 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 central bank 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 should raise rates in normal times to offset distortions from reducing rates in adverse times
Business · Economics · Financial crisis · Financial fragility · Financial stability · Financial system · Fragility · Interest rate · Macroeconomics · Market liquidity · Monetary economics · Too big to fail · Banking stability, regulation, efficiency · Economic theories and models · Finance · Global Financial Crisis and Policies
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| Unique citing works | 6 |
|---|---|
| Citations per year | 0,5 |
| Citation span | 2014 - 2025 (12) |
| Citation velocity | recent |
| Highly cited | No |
| Citation types | Neutral: 6 |