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Bank runs, welfare and policy implications

Author

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  • Haibin Zhu

Abstract

This paper proposes a model in which bank runs are closely related to the state of the business cycle. The benchmark model shows that, in a market economy, there are welfare losses due to the existence of bank runs. Extensions of the model explore the welfare effects of various government policies. The results suggest that an interest-cap deposit insurance scheme is an efficient policy to prevent bank runs, while other policies, including the suspension of convertibility, a penalty on short-term deposits and full-coverage deposit insurance schemes, will all have adverse side effects.

Suggested Citation

  • Haibin Zhu, 2001. "Bank runs, welfare and policy implications," BIS Working Papers 107, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:107
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    References listed on IDEAS

    as
    1. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    2. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June.
    3. Curtis R. Taylor & Thomas D. Jeitschko, 2001. "Local Discouragement and Global Collapse: A Theory of Coordination Avalanches," American Economic Review, American Economic Association, vol. 91(1), pages 208-224, March.
    4. David Backus & Silverio Foresi & Liuren Wu, 2002. "Contagion in Financial Markets," Finance 0207009, EconWPA.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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