Working Paper: NBER ID: w19129
Authors: Mark Gertler; Nobuhiro Kiyotaki
Abstract: We develop a variation of the macroeconomic model with banking in Gertler and Kiyotaki (2011) that allows for liquidity mismatch and bank runs as in Diamond and Dybvig (1983). As in Gertler and Kiyotaki, because bank net worth fluctuates with aggregate production, the spread between the expected rates of return on bank assets and deposits fluctuates counter-cyclically. However, because bank assets are less liquid than deposits, bank runs are possible as in Diamond and Dybvig. Whether a bank run equilibrium exists depends on bank balance sheets and an endogenously determined liquidation price for bank assets. While in normal times a bank run equilibrium may not exist, the possibility can arise in a recession. We also analyze the effects of anticipated bank runs. Overall, the goal is to present a framework that synthesizes the macroeconomic and microeconomic approaches to banking and banking instability.
Keywords: No keywords provided
JEL Codes: E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| depletion of bank capital (F65) | increase in the cost of bank credit (G21) |
| increase in the cost of bank credit (G21) | slow economic activity (E66) |
| slow economic activity (E66) | depress asset prices (G19) |
| bank capital depletion (F65) | economic downturn (F44) |
| liquidation value of bank assets falls below outstanding liabilities (G33) | bank runs (E44) |
| anticipated bank runs (E44) | heightened financial distress (G33) |