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Run Equilibria in a Model of Financial Intermediation

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  • Todd Keister

    (Research and Statistics Group, Federal Reserve Bank of New York)

  • Huberto M. Ennis

    (Research Department, Federal Reserve Bank of Richmond)

Abstract

We study the Green and Lin (JET, 2003) model of financial intermediation with two new features: traders may face a cost of contacting the intermediary and consumption needs may be correlated across traders. We show that each of these features is capable of generating an equilibrium in which some (but not all) traders "run" on the intermediary by withdrawing their funds at the first opportunity regardless of their true consumption needs. Our results also provide some insight into the elements of the economic environment that are necessary for a run equilibrium to exist in general models of financial intermediation. In particular, they highlight the importance of information frictions that cause the intermediary and traders to have different beliefs, in equilibrium, about the consumption needs of those traders who have yet to contact the intermediary.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 513.

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Date of creation: 2008
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Handle: RePEc:red:sed008:513

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  1. David Andolfatto & Ed Nosal & Neil Wallace, 2006. "The role of independence in the Green-Lin Diamond-Dybvig model," Working Paper 0615, Federal Reserve Bank of Cleveland.
  2. Green, Edward J. & Lin, Ping, 2003. "Implementing efficient allocations in a model of financial intermediation," Journal of Economic Theory, Elsevier, vol. 109(1), pages 1-23, March.
  3. Todd Keister & Huberto M. Ennis, 2007. "Commitment and Equilibrium Bank Runs," 2007 Meeting Papers 509, Society for Economic Dynamics.
  4. Andolfatto, David, 2007. "Bank Incentives, Contract Design, and Bank Runs," MPRA Paper 8146, University Library of Munich, Germany.
  5. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  6. James Peck & Karl Shell, 2003. "Equilibrium Bank Runs," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 103-123, February.
  7. Edward J. Green & Ping Lin, 2000. "Diamond and Dybvig's classic theory of financial intermediation : what's missing?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-13.
  8. Neil Wallace, 1988. "Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-16.
  9. Neil Wallace, 1990. "A banking model in which partial suspension is best," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 11-23.
  10. Cooper, Russell & Ross, Thomas W., 1998. "Bank runs: Liquidity costs and investment distortions," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 27-38, February.
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Cited by:
  1. Uhlig, Harald, 2010. "A model of a systemic bank run," Journal of Monetary Economics, Elsevier, vol. 57(1), pages 78-96, January.
  2. Stephen D. Williamson & Randall Wright, 2010. "New Monetarist Economics: methods," Staff Report 442, Federal Reserve Bank of Minneapolis.
  3. Williamson, Stephen D. & Wright, Randall, 2010. "New Monetarist Economics: Models," MPRA Paper 21030, University Library of Munich, Germany.
  4. Huberto M. Ennis & Todd Keister, 2007. "Commitment and equilibrium bank runs," Staff Reports 274, Federal Reserve Bank of New York.
  5. Huberto M. Ennis & Todd Keister, 2010. "On the fundamental reasons for bank fragility," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 33-58.

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