@article{a94bb0c3f4454e38a029a557b7febe57,
title = "Money, financial stability and efficiency",
abstract = "Most analyses of banking crises assume that banks use real contracts but in practice contracts are nominal. We consider a standard banking model with aggregate return risk, aggregate liquidity risk and idiosyncratic liquidity shocks. With non-contingent nominal deposit contracts, a decentralized banking system can achieve the first-best efficient allocation if the central bank accommodates the demands of the private sector for fiat money. Price level variations allow full sharing of aggregate risks. An interbank market allows the sharing of idiosyncratic liquidity risk. In contrast, idiosyncratic (bank-specific) return risks cannot be shared using monetary policy alone as real transfers are needed.",
keywords = "Central bank, Commercial banks, Risk sharing",
author = "Franklin Allen and Elena Carletti and Douglas Gale",
note = "Funding Information: We are grateful to Todd Keister, Michael Woodford, Luigi Zingales, participants at the Bank of Portugal Conference on Financial Intermediation in Faro in June 2009, at workshops at ESSET 2011 in Gerzensee, the Becker–Friedman Conference on Macroeconomic Fragility 2012, FIRS 2012 in Minneapolis, the NBER Finance and Macroeconomics Summer Institute Workshop 2012, the Federal Reserve Banks of Chicago and New York, the Sveriges Riksbank, the University of Maryland, the University of North Carolina, the University of Pennsylvania and particularly to the Associate Editor for helpful comments. This paper is produced as part of the project {\textquoteleft}Politics, Economics and Global Governance: The European Dimensions{\textquoteright} (PEGGED) funded by the Theme Socio-economic Sciences and Humanities of the European Commissionʼs 7th Framework Programme for Research , Grant Agreement No. 217559 . We are also grateful to the Wharton Financial Institutions Center for financial support. ",
year = "2014",
month = jan,
doi = "10.1016/j.jet.2013.02.002",
language = "English (US)",
volume = "149",
pages = "100--127",
journal = "Journal of Economic Theory",
issn = "0022-0531",
publisher = "Academic Press Inc.",
number = "1",
}