Working Paper: NBER ID: w2764
Authors: Peter M. Garber; Vittorio U. Grilli
Abstract: In this paper, we extend the bank run literature to an open economy model. We show that a foreign banking system, by raising deposit rates in the presence of a domestic banking panic, may generate sufficient liquid resources to acquire assets sold by the domestic banking system at bargain prices. In this case, foreign depositors will benefit from the domestic panic. We also show that our simple model is able to generate the spreading of panics. Perhaps not surprisingly, the crucial element in determining the propagation of financial crises is the effect of interest rates on savings decisions.
Keywords: bank runs; open economies; financial crises; international transmission
JEL Codes: E44; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic banking panic (F65) | Foreign banks raise deposit rates (G21) |
| Foreign banks raise deposit rates (G21) | Accumulation of liquid resources (E22) |
| Accumulation of liquid resources (E22) | Purchase of undervalued assets from domestic banking system (G21) |
| Domestic banking panic (F65) | Benefit to foreign depositors (F34) |
| Higher interest rates (E43) | Increased savings (D14) |
| Increased savings (D14) | Exacerbation of panic behavior among depositors (E44) |
| Bank run in domestic country (E44) | Self-fulfilling prophecy of fund withdrawal (G41) |
| Self-fulfilling prophecy of fund withdrawal (G41) | Insolvency of domestic banks (F65) |