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Do Sunspots Matter? Evidence from an Experimental Study of Bank Runs

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  • Jasmina Arifovic
  • Janet Hua Jiang

Abstract

A "sunspot" is a variable that has no direct impact on the economy’s fundamental condition, such as preferences, endowments or technologies, but may nonetheless affect economic outcomes through the expectations channel as a coordination device. This paper investigates how people react to sunspots in the context of a bank-run game in a controlled laboratory environment. The sunspot variable is a series of random public announcements predicting withdrawal outcomes. The treatment variable is the coordination parameter, defined as the minimum fraction of depositors required to wait so that waiting entails a higher payoff than withdrawing. We conduct treatments with a high, low and intermediate value of the coordination parameter. Although theory predicts that sunspot equilibria exist in all treatments, strong responses to sunspots only occur in the treatment featuring the intermediate value of the coordination parameter where strategic uncertainty is high. The policy implication is that people tend to respond strongly to public announcements during times of uncertainty. In those situations, communication to the public must be treated with extra care.

Suggested Citation

  • Jasmina Arifovic & Janet Hua Jiang, 2014. "Do Sunspots Matter? Evidence from an Experimental Study of Bank Runs," Staff Working Papers 14-12, Bank of Canada.
  • Handle: RePEc:bca:bocawp:14-12
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    Cited by:

    1. Siebert, Jan & Yang, Guanzhong, 2017. "Discoordination and miscoordination caused by sunspots in the laboratory," Working Papers on East Asian Studies 114/2017, University of Duisburg-Essen, Institute of East Asian Studies IN-EAST.
    2. repec:spr:joevec:v:27:y:2017:i:5:d:10.1007_s00191-017-0504-x is not listed on IDEAS
    3. Eloisa Campioni & Vittorio Larocca & Loredana Mirra & Luca Panaccione, 2017. "Financial literacy and bank runs: an experimental analysis," CEIS Research Paper 402, Tor Vergata University, CEIS, revised 07 Jul 2017.
    4. Gabriele Camera & Marco Casari & Stefania Bortolotti, 2016. "An Experiment on Retail Payments Systems," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(2-3), pages 363-392, March.
    5. Noemi Schmitt & Frank Westerhoff, 2017. "Heterogeneity, spontaneous coordination and extreme events within large-scale and small-scale agent-based financial market models," Journal of Evolutionary Economics, Springer, vol. 27(5), pages 1041-1070, November.

    More about this item

    Keywords

    Financial markets; Financial stability;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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