Working Paper: NBER ID: w29955
Authors: Lawrence Christiano; Hsn Dalgic; Xiaoming Li
Abstract: We highlight two challenges for the notion that a pure panic bank run played an important role in the dynamics in the Great Recession. First, the conclusion depends critically on ruling out any entry of new net worth into a sector experiencing a run. When interpreted as reflecting a cost of entry into banking, the resulting costs seem implausibly large across a range of models. Second, we show that the qualitative features of run equilibria (their existence, how many there are, etc.) are highly sensitive to minor technical changes in assumptions about banker entry. We report another result that is of independent interest. In particular, we describe implementation problems associated with standard macroprudential policy tools for reducing the risk of bank panic.
Keywords: Great Recession; Bank Panic; Macroprudential Policy
JEL Codes: G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| High entry costs (L11) | Panic hypothesis less credible (H12) |
| Assumptions about banker entry (G21) | Stability and nature of bank runs (E44) |
| Structural features of banking models (G21) | Effectiveness of macroprudential policies (E61) |
| Banker responses (G21) | Dynamics of bank runs (E44) |