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Money runs

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  • Donaldson, Jason Roderick
  • Piacentino, Giorgia

Abstract

In this paper, we develop a model that links the funding role of bank debt in the primary market to its circulation in the secondary market. We uncover a new rationale for why banks do what they do. Banks choose to fund themselves with demandable debt because it commands a high price, even though doing so exposes them to “money runs” resulting from its failure to circulate. In the model, banks endogenously perform the essential functions of real-world banks: they transform liquidity, transform maturity, pool assets, and have dispersed depositors. We show novel effects of suspension of convertibility.

Suggested Citation

  • Donaldson, Jason Roderick & Piacentino, Giorgia, 2022. "Money runs," Journal of Monetary Economics, Elsevier, vol. 126(C), pages 35-57.
    • Handle: RePEc:eee:moneco:v:126:y:2022:i:c:p:35-57
    DOI: 10.1016/j.jmoneco.2021.11.007
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    More about this item

    Keywords

    Banking; Security design; Private money; Financial fragility; Suspension of convertibility;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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