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Bank Runs and Business Cycles in a Small Open Economy

Author

Listed:
  • Chan Wang

    (School of Finance, Central University of Finance and Economics)

  • Gang Yi

    (China Economics and Management Academy, Central University of Finance and Economics)

Abstract

This paper incorporates financial intermediaries within a small open DSGE model and studies the effects of bank runs on economic activities. Shocks to the world interest rate induce capital outflows and asset price reduction, and the decline in asset prices weakens intermediaries' balance sheets, making them vulnerable to bank runs and leading, in turn, to a more severe and persistent recession. Our model is successful in generating some key properties observed in emerging market business cycles. We also asses the stabilization effect of capital control policy, numerical experiment suggests that countercyclical tax on capital flows is effective in absorbing the disturbance from external financial shocks and reducing the probability of bank runs.

Suggested Citation

  • Chan Wang & Gang Yi, 2019. "Bank Runs and Business Cycles in a Small Open Economy," Annals of Economics and Finance, Society for AEF, vol. 20(2), pages 847-865, November.
    • Handle: RePEc:cuf:journl:y:2019:v:20:i:2:wangyi
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    References listed on IDEAS

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    More about this item

    Keywords

    Bank runs; Financial frictions; Business cycles; Capital control;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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