Bank Runs, Fragility, and Credit Easing

No 785, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: We present a tractable dynamic macroeconomic model of self-fulfilling bank runs. A bank is vulnerable to a run when a loss of investors’ confidence triggers deposit withdrawals and leads the bank to default on its obligations. We analytically characterize how the vulnerability of an individual bank depends on macroeconomic aggregates and how the number of banks facing a run affects macroeconomic aggregates in turn. In general equilibrium, runs can be partial or complete, depending on aggregate leverage and the dynamics of asset prices. Our normative analysis shows that the effectiveness of credit easing and its welfare implications depend on whether a financial crisis is driven by fundamentals or by self-fulfilling runs.

Keywords: Bank runs; Financial crises; Credit easing (search for similar items in EconPapers)
JEL-codes: E32 E44 E58 G01 G21 G33 (search for similar items in EconPapers)
Pages: 73
Date: 2021-10-15
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Bank Runs, Fragility, and Credit Easing (2024)
Working Paper: Bank Runs, Fragility, and Credit Easing (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:93466

DOI: 10.21034/wp.785

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