Optimal liquidity provision through a demand deposit scheme: The Jacklin critique revisited

23 September 2012
Publication Type: Working Paper
JEL Code: D82, G21, G32

We derive conditions such that optimal liquidity provisions through a demand deposit scheme can be sustainably implemented in a subgame perfect Nash equilibrium under the assumption that renegade investors have free access to ex-post asset markets. As our qualitative main finding we demonstrate that such sustainability is more likely for poor than for rich”scheme participants in terms of future income. By establishing sustainability for low future income populations, our formal analysis therefore o¤ers an important qualification of Jacklin’s(1987) influential claim that an optimal demand deposit scheme is not sustainable whenever there exists the possibility of an ex-post asset market.

Working Paper 208
1 March 2011
Journal: German Economic Review 2012