The Macroeconomics of Deposit Insurance in a Two-country Model
This paper develops a macroeconomic framework to analyze the implications of different deposit insurance regimes in the Eurozone. I develop a two-country model with banks that are subject to endogenous and costly bank runs. The two countries are financially integrated through an interbank market. I analyze the macroeconomic impact of deposit insurance at the national level and compare it with harmonized or joint deposit insurance. I find that harmonized and joint deposit insurance both increase steady-state consumption and output and reduce macroeconomic volatility, thus leading to welfare gains. However, the two countries do not agree on the welfare ranking of harmonized versus joint deposit insurance.