Diamond and Dybvig (1983) discovered that deposit insurance can prevent both bank runs and financial crises. Moreover, demand deposits might achieve the equilibrium that maximizes social welfare. However, Diamond and Dybvig (1983) neglected the growth effect of deposit insurance. This paper considers endogenous growth and finds that deposit insurance can prevent bank runs due to random withdrawals, resulting in a higher rate of economic growth. Through a simulation, this paper concludes that the optimal deposit insurance to maximize social welfare only offers partial protection, and Diamond and Dybvig (1983) underestimated this optimal deposit insurance since they did not consider the growth effect of deposit insurance.
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