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Modeling the Great Recession as a Bank Panic: Challenges

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  • Lawrence Christiano
  • Hüsnü Dalgic
  • Xiaoming Li

Abstract

We highlight two challenges for the notion that a pure panic bank run played an important role in the dynamics in the Great Recession. First, the conclusion depends critically on ruling out any entry of new net worth into a sector experiencing a run. When interpreted as reflecting a cost of entry into banking, the resulting costs seem implausibly large across a range of models. Second, we show that the qualitative features of run equilibria (their existence, how many there are, etc.) are highly sensitive to minor technical changes in assumptions about banker entry. We report another result that is of independent interest. In particular, we describe implementation problems associated with standard macroprudential policy tools for reducing the risk of bank panic.

Suggested Citation

  • Lawrence Christiano & Hüsnü Dalgic & Xiaoming Li, 2022. "Modeling the Great Recession as a Bank Panic: Challenges," NBER Working Papers 29955, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29955
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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises

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