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Modelling the Great Recession as a Bank Panic: Challenges

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  • Lawrence Christiano
  • Husnu 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. We find that the implied cost of entry is implausibly large, across a range of pure panic 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.

Suggested Citation

  • Lawrence Christiano & Husnu Dalgic & Xiaoming Li, 2022. "Modelling the Great Recession as a Bank Panic: Challenges," Economica, London School of Economics and Political Science, vol. 89(S1), pages 200-238, June.
    • Handle: RePEc:bla:econom:v:89:y:2022:i:s1:p:s200-s238
    DOI: 10.1111/ecca.12426
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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises

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