Connect with us

Economic

Diamond and Dybvig model

Avatar

Published

on

The Diamond and Dybvig model was first identified in a base paper by Douglas W. Diamond and Philip H. Dybvig in 1983 in Famous Journal of Political Economy Essay, “Management of Banks, Deposit Insurance, and Liquidity.” You can think of this model as our basic understanding, in modular form, of how brokerage works. It’s the basis for how economists think about deposit insurance and also the Federal Reserve’s last-resort jobs lender.

here is a file Exhibition 2007 for the diamond model. You can start with the basic idea that banks’ assets are often illiquid, yet depositors wish to be liquid. If you are a depositor, and you own 1/2000 of a loan to a local Chinese restaurant, you cannot easily write a check or make a credit card transaction based on this loan. The loan will be expensive to sell and the bid-ask spread will be high.

Now enter the banks. Banks hold and extend loans and assume the risk of fluctuations in these asset values. At the same time, banks issue liquid demand deposits to their customers. Customers have liquidity, and banks own assets. Obviously, for this to work, the banks will earn (on average) more on their loans than they pay on deposits. However, clients prefer this arrangement because they have transferred their risk and liquidity issues to the bank.

This arrangement works because (usually) not all customers want to withdraw their money from the bank at the same time. Of course we call that bank runoff.

Advertisement

In the event of bank outflows, the bank can repay the customers only by selling a large percentage of the loans, and possibly all of them. But we have already noticed that these loans are illiquid and cannot easily be sold at a good price, especially if the banks are trying to sell them all at the same time.

Note that in this model there are multiple equilibria. In one equilibrium, customers expect other customers to trust the bank and there is no significant influx of withdrawing all deposits. In another equilibrium, everyone expects a scramble for the bank, and that becomes a self-fulfilling prophecy. After all, if you know the bank is going to have trouble meeting its obligations, you’ll try to get your money out sooner rather than later.

In the simplest form of this model, a bank is a joint venture owned by the customers. So there is no independent shareholder decision to put up capital to reduce the chance of a bad outcome. Some economists have seen the Diamond-Dybvig model as limited for this reason, but over time the model has been enriched with a variety of assumptions, including by Diamond himself (with Rajan). It has resulted in the appearance of a file The whole literature on the microeconomics of brokerage, which has resulted in the production of thousands of pieces in a similar theoretical context.

The model also embodies what is known as a “serial constraint”. That is, the primary bank is obligated to follow a “first come, first served” approach to customer service. If we loosen the chain service restrictions, it is possible to shut down the bank with a richer set of contracts. For example, the bank may reserve the right to limit, suspend or delay transferability, possibly with a reward that is then sent to customers for waiting. These incentives, or other similar contracts, may be able to stem bank inflows.

In this model, the operation of the bank does not occur because the bank is insolvent. Instead, the bank run is caused by “sunspots” – running is caused by the anticipation of running. If the bank is insolvent, simply postponing convertibility will not solve the underlying problem.

Advertisement

It is easy enough to see how a deposit insurance or a Federal Reserve lender could improve the underlying outcome. If customers start an initial run on the bank, the FDIC or Federal Reserve guarantees the deposits. Then there is no reason to keep running, and the economy continues to move in a Pareto superior fashion. Of course, deposit insurance or the Fed can create ethical problems for banks – they may take too many risks with such guarantees – and these problems have been studied further in the subsequent literature.

Along related (but completely different!) lines, Diamonds (singularly) have A 1984 review of economic studies piece “Brokerage and Monitoring Authorization.” This piece represents the advantages of brokerage in a completely different way. It is necessary to monitor the quality of loans, and banks have a comparative advantage in doing this, compared to depositors. Moreover, the bank can monitor the quality of loans in a diversified manner, since it keeps several loans in its portfolio. Bank control involves less risk than depositor control, in addition to being less costly. This piece also had a significant influence on later literature.

over here Diamonds at google.scholar.com – You can see that he is a very focused economist. over here Dybvig at scholar.google.comMost of his other articles on finance are narrower in scope, but he won an award for this work in banking and brokerage. I cut it On asset pricing and interest rate structure is a well known term.

Here it is all Swedish information on researchers and their work. I haven’t read it yet, but it’s usually pretty good.

In general, these award choices were not at all surprising and were expected a few years ago.

Advertisement

Source link

Continue Reading
Advertisement
Click to comment

Leave a Reply

Your email address will not be published.

Economic

Georgieva of the International Monetary Fund to discuss the economy and Covid with Chinese authorities via Reuters

Avatar

Published

on


© Reuters. International Monetary Fund Managing Director Kristalina Georgieva attends a press conference following a meeting at the Federal Chancellery in Berlin, Germany on November 29, 2022. REUTERS/Michel Tantosi

NEW YORK (Reuters) – International Monetary Fund Managing Director Kristalina Georgieva said on Thursday that she will travel to Beijing next week with heads of other international institutions to discuss China’s economic outlook and COVID-19 policies with the country’s leadership.

“This is the first time, and we hope we can sit down together and discuss the very pressing issues facing China and the world,” Georgieva told the upcoming Reuters conference.

Source link

Advertisement
Continue Reading

Economic

Dutch minister defends trade relations with China

Avatar

Published

on

A senior Dutch minister has defended the country’s deepening trade ties with China and vowed not to overreact on high-tech exports as the Biden administration pushes its European partners to harden their stance on Beijing.

The Netherlands remains “very positive” about its relationship with China, Micky Adriansens, the economy minister, said, saying Dutch companies operating there are providing a boost to innovation and trade.

As the United States presses its partners to tighten controls on exports of high-end semiconductor equipment to China, it has insisted that the Netherlands and Europe “must have their own strategy.”

“We have to think about this through – what are the risks of doing business with China in terms of certain products and value chains,” she told the Financial Times. “In general, we in the Netherlands are very positive and always have good relations with China. We do a lot of business with China. There are a lot of Dutch companies operating.”

Advertisement

China accounts for 11 percent of Dutch imports, second only to Germany, and about 5 percent of exports.

The minister said that the relationship “gives a real boost to innovation and trade which is fundamental for Europe. We must cherish that as well.”

The remarks appear to contradict those of US Secretary of State Antony Blinken this week, who said he has seen “growing rapprochement” between the US and its allies on China. Blinken’s comments follow the US decision in October to impose strict export controls aimed at slowing China’s development capacity and preventing it from obtaining advanced semiconductors that could be used for military purposes.

The Netherlands is home to ASML and ASM International, two world-leading manufacturers of chip equipment.

The United States is now trying to persuade the Netherlands and Japan, another big player in the global chip industry, to strike a three-way deal that would further limit China’s access to chip-making tools.

Advertisement

US sanctions, which prevent companies from sending many US-made products to China, have already hurt Dutch industry. ASMI He said This week they will affect about 40 percent of sales to China, which accounts for 16 percent of the group’s revenue.

Adriaansens declined to comment on the possible time frame in the semiconductor talks, saying it’s “not a simple yes or no,” but a matter of examining many aspects of a very complex production process. “You have to be very clear about which aspect of the production process is the most important issue for China,” she said.

“The Netherlands and Europe should have their own strategy,” she said, when asked about the US talks. At the same time, they needed to be aware of the risks associated with “specific technologies”. She added, “You don’t want to overdo it, but on the other hand, you don’t want to open your doors where safety is the number one issue — it’s a balancing thing.”

She also warned that it may not be possible to prevent China from acquiring advanced technology. “The development cycle is going very fast in China. We must not be naive.”

Adriaansens said the US’s separate actions to provide massive green technology subsidies to local businesses are troubling The Hague.

Advertisement

The European Union said that a large part of the $369 billion in tax breaks and tax support in the United States Inflation Reduction Act discriminatory and violates global trade rules, and is in talks with Washington.

“The law to reduce inflation has an impact on industry and the economy in the Netherlands and the EU as a whole,” said Adriaansens. Combined with lower energy prices, it would deter investors and hurt European business competitiveness.

The minister added that the West should have a level playing field and “the same set of rules”. I compared it to the upcoming World Cup match with the United States. “We would like to have the same goal size and the same lines on the field in both halves.”

Source link

Advertisement
Continue Reading

Economic

Brazil’s Economy Grows Less Than Expected In The Third Quarter, But Still At A Record High By Reuters

Avatar

Published

on


© Reuters. FILE PHOTO: Containers to be loaded at a cargo terminal at the Port of Santos in Santos, Brazil on September 16, 2021. REUTERS/Carla Carnel

BRASILIA (Reuters) – Brazil’s economy slowed in the third quarter, with growth less than expected but still enough to put it at the highest level in the chain since its inception in 1996.

The country’s gross domestic product rose 0.4% in the three months through September, state statistics agency IBGE said on Thursday, less than the 0.7% growth expected by economists polled by Reuters.

It was the fifth consecutive quarter of expansion, again boosted by the services sector, which put Latin America’s largest economy 4.5% above the level recorded before the pandemic, in the last quarter of 2019.

However, the loss of strength highlights the challenges ahead as the central bank’s aggressive monetary tightening to fight inflation began to overshadow activity further, overshadowing government stimulus ahead of the presidential election in October this year that helped boost demand.

Advertisement

The performance in the third quarter was mainly driven by 1.1% growth in the dominant services sector, while manufacturing grew 0.8% and agriculture fell 0.9%.

On the demand side, investment rose 2.8%, government spending grew 1.3%, and consumer spending increased 1.0%.

Brazil’s GDP expanded by 3.6% compared to the third quarter of 2021, while economists expected an increase of 3.7%.

IBGE also revised its second quarter result to expand 1.0% sequentially from the 1.2% previously reported. But growth in the first quarter has now picked up to 1.3% from 1.1% previously.

Source link

Advertisement

Continue Reading
Advertisement

Trending