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Commitment and Equilibrium Bank Runs

  • Todd Keister

    (Federal Reserve Bank of New York)

  • Huberto M. Ennis

    (Federal Reserve Bank of Richmond)

We study the role of commitment in a version of the Diamond and Dybvig (JPE, 1983) model with no aggregate uncertainty. As is well known, the banking authority can eliminate the possibility of a bank run by committing to suspend payments to depositors if a run were to start. We show, however, that in an environment without commitment the banking authority will choose to only partially suspend payments during a run. In some cases, the reduction in early payouts under this partial suspension is insufficient to convince depositors to not participate in the run. Bank runs can then occur with positive probability in equilibrium. The fraction of depositors participating in such a run is stochastic and can be arbitrarily close to one.

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Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 509.

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Date of creation: 2007
Date of revision:
Handle: RePEc:red:sed007:509
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  1. King, Robert G. & Wolman, Alexander L., 2004. "Monetary discretion, pricing complementarity and dynamic multiple equilibria," Working Paper Series 0343, European Central Bank.
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  8. Peck, James & Shell, Karl, 2001. "Equilibrium Bank Runs," Working Papers 01-10r, Cornell University, Center for Analytic Economics.
  9. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
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  12. Acharya, Viral V & Yorulmazer, Tanju, 2004. "Too Many to Fail - An Analysis of Time Inconsistency in Bank Closure Policies," CEPR Discussion Papers 4778, C.E.P.R. Discussion Papers.
  13. Marco Bassetto, 2002. "Equilibrium and government commitment," Working Papers 624, Federal Reserve Bank of Minneapolis.
  14. Green, Edward J. & Lin, Ping, 2003. "Implementing efficient allocations in a model of financial intermediation," Journal of Economic Theory, Elsevier, vol. 109(1), pages 1-23, March.
  15. Huberto M. Ennis & Todd Keister, 2004. "Bank runs and investment decisions revisited," Working Paper 04-03, Federal Reserve Bank of Richmond.
  16. George J. Mailath & Loretta J. Mester, 1993. "A positive analysis of bank closure," Working Papers 94-2, Federal Reserve Bank of Philadelphia.
  17. Neil Wallace, 1988. "Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-16.
  18. Ennis, Huberto M. & Keister, Todd, 2005. "Optimal fiscal policy under multiple equilibria," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1359-1377, November.
  19. Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2003. "Expectation Traps and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 715-741.
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  21. Gu, Chao, 2007. "Asymmetric Information and Bank Runs," Working Papers 07-14, Cornell University, Center for Analytic Economics.
  22. Chari, V V & Kehoe, Patrick J, 1990. "Sustainable Plans," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 783-802, August.
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  28. Huberto M. Ennis & Todd Keister, 2008. "Run equilibria in a model of financial intermediation," Staff Reports 312, Federal Reserve Bank of New York.
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  30. Peck, James & Shell, Karl, 1991. "Market Uncertainty: Correlated and Sunspot Equilibria in Imperfectly Competitive Economies," Review of Economic Studies, Wiley Blackwell, vol. 58(5), pages 1011-29, October.
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