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Flight to Liquidity and Systemic Bank Runs

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  • Roberto Robatto

    (University of Wisconsin-Madison)

Abstract

This paper presents a general equilibrium monetary model of fundamentals-based bank runs to study monetary injections during financial crises. When the probability of runs is positive, depositors increase money demand and reduce deposits; at the economy-wide level, the velocity of money drops and deflation arises. Two quantitative examples show that the model accounts for a large fraction of (i) the drop in deposits during the Great Depression and (ii) the $400 billion run on money market mutual funds in September 2008. In some circumstances, monetary injections have no effects on prices but reduce money velocity and deposits. Counterfactual policy analyses show that, if the Federal Reserve had not intervened in September 2008, the run on money market mutual funds would have been $141 billion smaller.

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  • Roberto Robatto, 2018. "Flight to Liquidity and Systemic Bank Runs," 2018 Meeting Papers 276, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:276
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    References listed on IDEAS

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    Cited by:

    1. Benigno, Pierpaolo & Robatto, Roberto, 2016. "Private Money Creation and Equilibrium Liquidity," CEPR Discussion Papers 11242, C.E.P.R. Discussion Papers.

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