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A Monetary Model of Banking Crises

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Author Info
KOBAYASHI Keiichiro
Abstract

We propose a new model for policy analysis of banking crises (or systemic bank runs) based on the monetary framework developed by Lagos and Wright (2005). If banks cannot enforce loan repayment and have to secure loans by collateral, a banking crisis due to coordination failure among depositors can occur in response to a sunspot shock, and the banks become insolvent as a result of the bank runs. The model is tractable and easily embedded into a standard business cycle model. The model naturally makes a distinction between money and goods, while most of the existing banking models do not. This distinction enables us to clarify further the workings of banking crises and crisis management policies. In particular, we may be able to use this framework to compare the efficacy of fiscal stimulus, monetary easing, and bank reforms as recovery efforts from the current global financial crisis.

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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 09036.

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Length: 47 pages
Date of creation: Jul 2009
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Handle: RePEc:eti:dpaper:09036

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  1. Bruce Champ & Bruce D. Smith & Stephen D. Williamson, 1996. "Currency Elasticity and Banking Panics: Theory and Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 828-64, November. [Downloadable!] (restricted)
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  2. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 287-327, April. [Downloadable!] (restricted)
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  3. Berentsen, Aleksander & Camera, Gabriele & Waller, Christopher, 2007. "Money, credit and banking," Journal of Economic Theory, Elsevier, vol. 135(1), pages 171-195, July. [Downloadable!] (restricted)
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  4. McAndrews James J. & Roberds William, 1995. "Banks, Payments, and Coordination," Journal of Financial Intermediation, Elsevier, vol. 4(4), pages 305-327, October. [Downloadable!] (restricted)
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  5. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
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