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Rev Fin 1994; 7:389-417
© 1994 the Society for Financial Studies

Article

Bank liquidity and stability in an overlapping generations model

J Qi
Department of Finance, College of Business Administration, University of South Florida, 4202 East Fowler Avenue, BSN 3403, Tampa, FL 33620-5500, USA

Abstract

In an infinitely repeated version of the Diamond and Dybvig (1983) model, intergenerational transfers enable a bank to achieve interest rate smoothing and to provide depositors with liquidity insurance without Diamond and Dybvig's assumption of no side trades. The bank is subject to runs that may result from either excessive withdrawals or the lack of new deposits. The latter cause, which cannot occur in Diamond and Dybvig's one-generation model, implies that suspension of convertibility may not prevent bank runs. Government intervention may be necessary to maintain bank stability.


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