Banking, Liquidity, and Bank Runs in an Infinite Horizon Economy
- (pp. 2011-43)
Abstract
We develop an infinite horizon macroeconomic model of banking that allows for liquidity mismatch and bank runs. Whether a bank run equilibrium exists depends on bank balance sheets and an endogenous liquidation price for bank assets. While in normal times a bank run equilibrium may not exist, the possibility can arise in recessions. A run leads to a significant contraction in intermediation and aggregate economic activity. Anticipations of a run have harmful effects on the economy even if the run does not occur. We illustrate how the model can shed light on some key aspects of the recent financial crisis. (JEL E23, E32, E44, G01, G21, G33)Citation
Gertler, Mark, and Nobuhiro Kiyotaki. 2015. "Banking, Liquidity, and Bank Runs in an Infinite Horizon Economy." American Economic Review, 105 (7): 2011-43. DOI: 10.1257/aer.20130665Additional Materials
JEL Classification
- E23 Macroeconomics: Production
- E32 Business Fluctuations; Cycles
- E44 Financial Markets and the Macroeconomy
- G01 Financial Crises
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G33 Bankruptcy; Liquidation