Money and Modern Bank Runs
AbstractFollowing Diamond and Dybvig (1983), bank runs in the literature take the form of withdrawals of demand deposits payable in real goods, which deplete a fixed reserve of goods in the banking system. This paper examines modern bank runs, in which withdrawals typically take the form of wire transfers by large depositors. These transfers shift balances among banks, with no analog of a depletion of a scarce reserve from the banking system. I show that with demand deposits payable in money using modern payment systems, panic runs do not occur if there is efficient lending among banks. Aggregate shocks also do not cause bank runs because nominal deposits allow consumption to adjust efficiently with prices. Currency withdrawals do not allow for traditional consumer runs unless all banks are subject to panics. However, if interbank lending breaks down, bank runs occur due to a coordination failure in which banks do not lend to a bank in need, and can lead to price deflation and contagion to other banks being run. Policy conclusions such as deposit insurance and suspension of convertibility that solve depositor-based runs, as in Diamond-Dybvig, are neither necessary nor sufficient to prevent interbank-based banking crises. Rather, central bank intervention as lender of last resort is necessary. The model corresponds to evidence of the banking crisis that required unprecedented Federal Reserve intervention following September 11, 2001
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 785.
Date of creation: 2004
Date of revision:
Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
bank runs; money; nominal contracts; interbank market; prices; contagion; lender of last resort; banking crisis;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-02 (All new papers)
- NEP-CBA-2004-08-02 (Central Banking)
- NEP-MAC-2004-08-02 (Macroeconomics)
- NEP-MON-2004-08-02 (Monetary Economics)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Goetz von Peter, 2004.
"Asset prices and banking distress: a macroeconomic approach,"
BIS Working Papers
167, Bank for International Settlements.
- von Peter, Goetz, 2009. "Asset prices and banking distress: A macroeconomic approach," Journal of Financial Stability, Elsevier, vol. 5(3), pages 298-319, September.
- Skeie, David R., 2008.
"Banking with nominal deposits and inside money,"
Journal of Financial Intermediation,
Elsevier, vol. 17(4), pages 562-584, October.
- Martin, A. & Skeie, D. & Thadden, E.L. von, 2010.
2010-44S, Tilburg University, Center for Economic Research.
- Antoine Martin & David Skeie & Ernst-Ludwig von Thadden, 2010. "Repo runs," Staff Reports 444, Federal Reserve Bank of New York.
- Martin, Antoine & Skeie, David & von Thadden, Ernst-Ludwig, 2013. "Repo Runs," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 448, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- Antoine Martin & David Skeie & Ernst-Ludig von Thadden, 2011. "Repo Runs," FMG Discussion Papers dp687, Financial Markets Group.
- Douglas W. Diamond & Raghuram G. Rajan, 2006.
"Money in a Theory of Banking,"
American Economic Review,
American Economic Association, vol. 96(1), pages 30-53, March.
- Viral V. Acharya & David Skeie, 2011.
"A model of liquidity hoarding and term premia in inter-bank markets,"
498, Federal Reserve Bank of New York.
- Acharya, Viral V. & Skeie, David, 2011. "A model of liquidity hoarding and term premia in inter-bank markets," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 436-447.
- Acharya, Viral V & Skeie, David, 2011. "A Model of Liquidity Hoarding and Term Premia in Inter-Bank Markets," CEPR Discussion Papers 8705, C.E.P.R. Discussion Papers.
- Goetz von Peter, 2004. "Asset Prices and Banking Distress: A Macroeconomic Approach," Finance 0411034, EconWPA.
- Schanz, Jochen, 2009. "How do different models of foreign exchange settlement influence the risks and benefits of global liquidity management?," Bank of England working papers 374, Bank of England.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).
If references are entirely missing, you can add them using this form.