| Popis: |
The regulation of deposit interest rates has received little support from economists. The same is true for the original rationale for such regulation: that bank competition for deposits generates inherent ‘instability’ in the banking system. This paper develops an ‘adverse selection’ model of banking in which this rationale is correct. Moreover, in this model instability in the banking system can arise despite the presence of a ‘lender of last resort’, and despite the absence of any need for ‘deposit insurance’. However, in the world described, the regulation of deposit interest rates is shown to be an appropriate response to ‘instability’ in the banking system. Finally, it is argued that ‘adverse selection’ models of deposit interest rate determination can confront a number of observed phenomena that are not readily explained in other contexts. |
