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A Monetary Model of Banking Crises

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  • 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
Date of revision:
Handle: RePEc:eti:dpaper:09036

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  1. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
  2. Douglas W. Diamond & Raghuram G. Rajan, 1998. "Liquidity risk, liquidity creation and financial fragility: a theory of banking," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
  3. Champ, B. & Snith, B.D. & Williamson, D.S., 1991. "Currency Elasticity and Banking Panics: Theory and Evidence," RCER Working Papers 292, University of Rochester - Center for Economic Research (RCER).
  4. Aleksander Berentsen & Gabriele Camera & Christopher Waller, . "Money, Credit and Banking," IEW - Working Papers 219, Institute for Empirical Research in Economics - University of Zurich.
  5. McAndrews James J. & Roberds William, 1995. "Banks, Payments, and Coordination," Journal of Financial Intermediation, Elsevier, vol. 4(4), pages 305-327, October.
  6. Aruoba, S. Boragan & Waller, Christopher J. & Wright, Randall, 2011. "Money and capital," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 98-116, March.
  7. John H. Boyd & Pedro Gomis-Porqueras & Sungkyu Kwak & Bruce David Smith, 2014. "A User's Guide to Banking Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 800-892, November.
  8. James McAndrews & William Roberds, 1999. "Payment intermediation and the origins of banking," Working Paper 99-11, Federal Reserve Bank of Atlanta.
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