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Flight to liquidity and systemic bank runs

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  • Robatto, Roberto

Abstract

This paper presents a general equilibrium, monetary model of 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 in 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 much smaller. JEL Classification: E44, E51, G20

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  • Robatto, Roberto, 2017. "Flight to liquidity and systemic bank runs," ESRB Working Paper Series 38, European Systemic Risk Board.
    • Handle: RePEc:srk:srkwps:201738
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    File URL: https://www.esrb.europa.eu//pub/pdf/wp/esrbwp38.en.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Bank Runs; Endogenous Money Velocity; Flight to Liquidity; Great Depression; Great Recession; Monetary Injections; Money Market Mutual Funds;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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