Quarterly Review 1442
A Banking Model in Which Partial Suspension Is Best
This paper establishes that partial suspension is an optimal arrangement in an aggregate-risk version of the Diamond-Dybvig (1983) model. The model is a variant of Wallace (1988) in which aggregate risk about the fraction of agents who "want to" consume early is limited to a small group who show up last to possibly withdraw early. Partial suspension means that when they do withdraw early, members of this group get less than those who showed up first to withdraw early. Limiting the aggregate risk to a group who show up last is a simplifying assumption because it makes it impossible to draw inferences about the aggregate state from the actions of those who show up first.
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