Banks' Liquidity Provision and Panic Runs with Recursive Preferences

12 Pages Posted: 25 Oct 2021

See all articles by Ettore Panetti

Ettore Panetti

University of Naples Federico II, CSEF - Center for Studies in Economics and Finance, Students; UECE - Research Unit on Complexity in Economics; SUERF - The European money and finance forum; CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF)

Date Written: October 20, 2021

Abstract

How important is it to distinguish relative risk aversion (RRA) from the intertemporal elasticity of substitution (IES) to study banks' provision of liquidity insurance and the effectiveness of deposit freezes against depositors' panic runs? To answer these questions, I develop a Diamond-Dybvig model of banking in which depositors feature recursive preferences. In equilibrium, banks provide liquidity insurance, and a time-consistent deposit freeze prevents panic runs, only if depositors' preferences for an early resolution of uncertainty are sufficiently strong, i.e if RRA is sufficiently larger than the inverse of IES.

Keywords: financial intermediation, bank runs, recursive preferences, relative risk aversion, intertemporal elasticity of substitution

JEL Classification: D81, G21, G28

Suggested Citation

Panetti, Ettore, Banks' Liquidity Provision and Panic Runs with Recursive Preferences (October 20, 2021). Available at SSRN: https://ssrn.com/abstract=3946455 or http://dx.doi.org/10.2139/ssrn.3946455

Ettore Panetti (Contact Author)

University of Naples Federico II, CSEF - Center for Studies in Economics and Finance, Students ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, 80126
Italy

UECE - Research Unit on Complexity in Economics ( email )

ISEG/UTL Rua Miguel Lupi 20
Lisboa, 1249-078
Portugal

SUERF - The European money and finance forum ( email )

PO Box 98
Amsterdam, 1000AB
Netherlands

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
45
Abstract Views
259
PlumX Metrics