Working Paper: NBER ID: w21892
Authors: Mark Gertler; Nobuhiro Kiyotaki; Andrea Prestipino
Abstract: There has been considerable progress in developing macroeconomic models of banking crises. However, most of this literature focuses on the retail sector where banks obtain deposits from households. In fact, the recent financial crisis that triggered the Great Recession featured a disruption of wholesale funding markets, where banks lend to one another. Accordingly, to understand the financial crisis as well as to draw policy implications, it is essential to capture the role of wholesale banking. The objective of this paper is to characterize a model that can be seen as a natural extension of the existing literature that provides a step toward accomplishing this objective. The model accounts for both the buildup and collapse of wholesale banking, and also sketches out the transmission of the crises to the real sector. We also draw out the implications of possible instaibility in the wholesale banking sector for lender-of-last resort policy as well as for macroprudential policy.
Keywords: wholesale banking; financial crises; macroeconomic modelling; bank runs
JEL Codes: E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Growth of wholesale banking (G21) | Increased systemic risk in the financial system (F65) |
| Malfunctioning of wholesale banking markets (F65) | Economic downturn (F44) |
| Disruptions in wholesale funding markets (F65) | Rising credit costs (G21) |
| Disruptions in wholesale funding markets (F65) | Reduced credit flows (F65) |
| Reduced credit flows (F65) | Contraction in the real economy (E20) |
| Instability in wholesale banking (F65) | Onset of the Great Recession (F65) |