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Bank runs, welfare and policy implications

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  • Haibin Zhu
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    Abstract

    This paper proposes a model in which bank runs are closely related to the state of the business cycle. The benchmark model shows that, in a market economy, there are welfare losses due to the existence of bank runs. Extensions of the model explore the welfare effects of various government policies. The results suggest that an interest-cap deposit insurance scheme is an efficient policy to prevent bank runs, while other policies, including the suspension of convertibility, a penalty on short-term deposits and full-coverage deposit insurance schemes, will all have adverse side effects.

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    Bibliographic Info

    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 107.

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    Length: 44 pages
    Date of creation: Dec 2001
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    Handle: RePEc:bis:biswps:107

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    1. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, Elsevier, vol. 51(1), pages 145-168, June.
    2. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, American Economic Association, vol. 89(3), pages 473-500, June.
    3. David Backus & Silverio Foresi & Liuren Wu, 2002. "Contagion in Financial Markets," Finance, EconWPA 0207009, EconWPA.
    4. Curtis R. Taylor & Thomas D. Jeitschko, 2001. "Local Discouragement and Global Collapse: A Theory of Coordination Avalanches," American Economic Review, American Economic Association, American Economic Association, vol. 91(1), pages 208-224, March.
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