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Banking panics and policy responses

  • Ennis, Huberto M.
  • Keister, Todd

When policy makers have limited commitment power, self-fulfilling bank runs can arise as an equilibrium phenomenon. We study how such banking panics unfold in a version of the Diamond and Dybvig (1983) model. A run in this setting is necessarily partial, with only some depositors participating. In addition, a run naturally occurs in waves, with each wave of withdrawals prompting a further response from policy makers. In this way, the interplay between the actions of depositors and the responses of policy makers shapes the course of a crisis.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 57 (2010)
Issue (Month): 4 (May)
Pages: 404-419

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Handle: RePEc:eee:moneco:v:57:y:2010:i:4:p:404-419
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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