Economic Quarterly - Federal Reserve Bank of Richmond

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from January 2004
Last Number: January 2010

Federal Reserve Bank of Richmond
ISSN 1069-7225

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Vol. 96 Nbr. 1, January 2010

Inside-Money Theory After Diamond and Dybvig

This article argues that the model in Diamond and Dybvig (DD) was a significant conceptual and methodological advance in studying banking arrangements. Its methodological contribution was the use of mechanism-design theory rather than the old strategy, still prevalent in textbooks and some of macro, of tacking a banking sector onto a model of market exchange. A great deal of attention has been given to the model's multiple equilibria and interpreting them as financial fragility. This attentio...

Introduction to the Special Issue On the Diamond-Dybvig Model


In the US during 2008-2009, as in previous episodes in the US and other countries, supplying funding to financial intermediaries and other firms was a component of the government's response to a financial crisis. Some of these funding initiatives have been characterized -- and, in some quarters, heavily criticized -- as being bailouts: transfers from the government, made to firms (and sometimes other entities such as city governments) or to their creditors in order to avert insolvency or miti...

On the Fundamental Reasons for Bank Fragility

Over the course of the recent financial crisis, several large financial institutions experienced sudden, massive withdrawals of their usual funding sources. This view of events implies that banks and other financial intermediaries are inherently fragile, in the sense of being susceptible to a self-fulfilling run by their depositors. This article discusses by reviewing the key theoretical contribution of the seminal work by Diamond and Dybvig (1983). It also discusses the basic elements of the...

Monetary Theory and Electronic Money: Reflections On the Kenyan Experience

In 2007, the leading cell phone company in Kenya, Safaricom Ltd, launched M-PESA, a short message service (SMS)-based money transfer system that allows individuals to deposit, send, and withdraw funds from a virtual account on their cell phones and that is separate from the banking system. M-PESA has grown rapidly, currently reaching more than seven million users, approximately 38% of Kenya's adult population, and it is widely viewed as a success story to be emulated across the developing wor...

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