Working Paper: NBER ID: w29397
Authors: Manuel Amador; Javier Bianchi
Abstract: We present a tractable dynamic general equilibrium model of self-fulfilling bank runs, where banks trade capital in competitive and liquid markets but remain vulnerable to runs due to a loss of creditor confidence. We characterize how the vulnerability of an individual bank depends on its leverage position and the economy wide asset prices. We study the effect of credit easing policies, in the form of asset purchases. When a banking crisis is generated by runs, credit easing can reduce the number of defaulting banks and enhance welfare. When the crisis is driven by fundamentals, credit easing may have adverse consequences.
Keywords: Bank Runs; Credit Easing; Financial Crises; Macroeconomic Model; General Equilibrium
JEL Codes: E44; E58; F34; G01; G33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bank's vulnerability to runs (E44) | macroeconomic aggregates (E10) |
| loss of investor confidence (G33) | deposit withdrawals (G21) |
| deposit withdrawals (G21) | bank defaults (G33) |
| number of banks facing a run (E44) | macroeconomic aggregates (E10) |
| credit easing (E51) | asset prices (G19) |
| asset prices (G19) | bank defaults (G33) |
| credit easing (E51) | fragility in a run-driven crisis (H12) |
| credit easing in a fundamentals-driven crisis (E51) | number of defaults (G33) |
| source of the crisis (H12) | effectiveness of credit easing (E51) |