Why do bank runs look like panic? A new explanation
This paper demonstrates that, even if depositors are fully rational and always choose the Pareto dominant equilibrium when there are multiple equilibria, a bank run may still occur when depositors’ expectations of the bank’s fundamentals do not change. More specifically, a bank run may occur when depositors learn that noisy bank-specific information is revealed, or when they learn that precise bank-specific information is not revealed. The results in this paper are consistent with empirical evidence about bank runs. It also implies that suspension of convertibility can improve the efficiency of bank runs.
|Date of creation:||27 Sep 2006|
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- Dwyer, Gerald Jr. & Hasan, Iftekhar, 2007.
"Suspension of payments, bank failures, and the nonbank public's losses,"
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- Douglas W. Diamond & Philip H. Dybvig, 2000.
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Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
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- Hasan, Iftekhar & Dwyer, Gerald P, Jr, 1994. "Bank Runs in the Free Banking Period," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(2), pages 271-88, May.
- V.V. Chari & Ravi Jagannathan, 1984. "Banking Panics," Discussion Papers 618, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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