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Money and Modern Bank Runs


  • David R. Skeie


Following Diamond and Dybvig (1983), bank runs in the literature take the form of withdrawals of demand deposits payable in real goods, which deplete a fixed reserve of goods in the banking system. This paper examines modern bank runs, in which withdrawals typically take the form of wire transfers by large depositors. These transfers shift balances among banks, with no analog of a depletion of a scarce reserve from the banking system. I show that with demand deposits payable in money using modern payment systems, panic runs do not occur if there is efficient lending among banks. Aggregate shocks also do not cause bank runs because nominal deposits allow consumption to adjust efficiently with prices. Currency withdrawals do not allow for traditional consumer runs unless all banks are subject to panics. However, if interbank lending breaks down, bank runs occur due to a coordination failure in which banks do not lend to a bank in need, and can lead to price deflation and contagion to other banks being run. Policy conclusions such as deposit insurance and suspension of convertibility that solve depositor-based runs, as in Diamond-Dybvig, are neither necessary nor sufficient to prevent interbank-based banking crises. Rather, central bank intervention as lender of last resort is necessary. The model corresponds to evidence of the banking crisis that required unprecedented Federal Reserve intervention following September 11, 2001

Suggested Citation

  • David R. Skeie, 2004. "Money and Modern Bank Runs," 2004 Meeting Papers 785, Society for Economic Dynamics.
  • Handle: RePEc:red:sed004:785

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    References listed on IDEAS

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    Cited by:

    1. Antoine Martin & David Skeie & Ernst-Ludwig von Thadden, 2014. "Repo Runs," Review of Financial Studies, Society for Financial Studies, vol. 27(4), pages 957-989.
    2. Schanz, Jochen, 2009. "How do different models of foreign exchange settlement influence the risks and benefits of global liquidity management?," Bank of England working papers 374, Bank of England.
    3. Acharya, Viral V. & Skeie, David, 2011. "A model of liquidity hoarding and term premia in inter-bank markets," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 436-447.
    4. von Peter, Goetz, 2009. "Asset prices and banking distress: A macroeconomic approach," Journal of Financial Stability, Elsevier, vol. 5(3), pages 298-319, September.
    5. Douglas W. Diamond & Raghuram G. Rajan, 2006. "Money in a Theory of Banking," American Economic Review, American Economic Association, vol. 96(1), pages 30-53, March.
    6. Skeie, David R., 2008. "Banking with nominal deposits and inside money," Journal of Financial Intermediation, Elsevier, vol. 17(4), pages 562-584, October.
    7. Goetz von Peter, 2004. "Asset Prices and Banking Distress: A Macroeconomic Approach," Finance 0411034, EconWPA.

    More about this item


    bank runs; money; nominal contracts; interbank market; prices; contagion; lender of last resort; banking crisis;

    JEL classification:

    • 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
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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