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Evolution, coordination, and banking panics

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  • Temzelides, Theodosios

Abstract

I study equilibrium selection by an evolutionary process in an environment with multiple equilibria, one of which involves a banking panic. The analysis is built on a repeated version of the Diamod-Dybvig (1983) model. The optimal (run free) equilibrium is uniquely selected if it is also "risk dominant." Furthermore, the probability of observing a panic increases as the size of the banks decreases. I discuss local interaction and contagion effects that allow for a bankrun to spread first among banks in the same geographic location and then throughout the entire population.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 40 (1997)
Issue (Month): 1 (September)
Pages: 163-183

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Handle: RePEc:eee:moneco:v:40:y:1997:i:1:p:163-183

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Web page: http://www.elsevier.com/locate/inca/505566

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References

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  1. Neil Wallace, 1988. "Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-16.
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  17. Villamil, A P, 1991. "Demand Deposit Contracts, Suspension of Convertibility, and Optimal Financial Intermediation," Economic Theory, Springer, vol. 1(3), pages 277-88, July.
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Citations

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Cited by:
  1. Upper, Christian, 2011. "Simulation methods to assess the danger of contagion in interbank markets," Journal of Financial Stability, Elsevier, vol. 7(3), pages 111-125, August.
  2. Chongmin Kim & Kam-Chau Wong, 2011. "Evolution of Walrasian equilibrium in an exchange economy," Journal of Evolutionary Economics, Springer, vol. 21(4), pages 619-647, October.
  3. Andrey Zubarev, 2013. "Russian Banking System: Stability Factors In the Wake of 2008-2009 Crisis," Working Papers 0049, Gaidar Institute for Economic Policy, revised 2013.
  4. Bougheas, Spiros, 1999. "Contagious bank runs," International Review of Economics & Finance, Elsevier, vol. 8(2), pages 131-146, June.
  5. Alexandra Lai, 2002. "Modelling Financial Instability: A Survey of the Literature," Working Papers 02-12, Bank of Canada.
  6. Hoag, Christopher, 2005. "Deposit drains on "interest-paying" banks before financial crises," Explorations in Economic History, Elsevier, vol. 42(4), pages 567-585, October.
  7. Huberto M. Ennis, 2003. "Economic fundamentals and bank runs," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 55-71.
  8. Jasmina Arifovic & Janet Hua Jiang, 2014. "Do Sunspots Matter? Evidence from an Experimental Study of Bank Runs," Working Papers 14-12, Bank of Canada.
  9. De Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic risk: A survey," Working Paper Series 0035, European Central Bank.
  10. Arifovic, Jasmina & Hua Jiang, Janet & Xu, Yiping, 2013. "Experimental evidence of bank runs as pure coordination failures," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2446-2465.
  11. Ennis, Huberto M. & Keister, Todd, 2010. "Banking panics and policy responses," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 404-419, May.
  12. Sébastien Vivier-Lirimont, 2004. "Interbanking networks : towards a small financial world ?," Cahiers de la Maison des Sciences Economiques v04046, Université Panthéon-Sorbonne (Paris 1).
  13. Luo, Xueming, 2003. "Evaluating the profitability and marketability efficiency of large banks: An application of data envelopment analysis," Journal of Business Research, Elsevier, vol. 56(8), pages 627-635, August.
  14. Niinimaki, Juha-Pekka, 2002. "Do time deposits prevent bank runs?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 12(1), pages 19-31, February.
  15. Philippe Madiès, 2001. "Coassurance des dépôts et panique bancaire : une étude expérimentale," Post-Print halshs-00151511, HAL.
  16. Raphael H. Solomon, 2003. "Anatomy of a Twin Crisis," Working Papers 03-41, Bank of Canada.

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