MARKET RATE VERSUS FIXED RATE DEMAND DEPOSITS

In an economy with uninsured banks, market rate deposits are shown to provide services identical to fixed rate deposits without risking bank ing panics as long as there is not both aggregate uncertainty, about l iquidity demands and asymmetric information about bank asset quality. However, if both factors are present, then the preferred deposit form depends on the riskiness of bank assets and information revealed throu gh market prices. The analysis may explain the evolution of fixed rate deposits before the introduction of deposit insurance. Moreover, it p rovides currently relevant insights regarding deposit contract forms a nd deposit insurance.