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Run Equilibria in a Model of Financial Intermediation

  • Todd Keister

    (Research and Statistics Group, Federal Reserve Bank of New York)

  • Huberto M. Ennis

    (Research Department, Federal Reserve Bank of Richmond)

We study the Green and Lin (JET, 2003) model of financial intermediation with two new features: traders may face a cost of contacting the intermediary and consumption needs may be correlated across traders. We show that each of these features is capable of generating an equilibrium in which some (but not all) traders "run" on the intermediary by withdrawing their funds at the first opportunity regardless of their true consumption needs. Our results also provide some insight into the elements of the economic environment that are necessary for a run equilibrium to exist in general models of financial intermediation. In particular, they highlight the importance of information frictions that cause the intermediary and traders to have different beliefs, in equilibrium, about the consumption needs of those traders who have yet to contact the intermediary.

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File URL: https://www.economicdynamics.org/meetpapers/2008/paper_513.pdf
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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 513.

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Date of creation: 2008
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Handle: RePEc:red:sed008:513
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  1. Andolfatto, David & Nosal, Ed & Wallace, Neil, 2007. "The role of independence in the Green-Lin Diamond-Dybvig model," Journal of Economic Theory, Elsevier, vol. 137(1), pages 709-715, November.
  2. 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.
  3. Huberto M. Ennis & Todd Keister, 2007. "Commitment and equilibrium bank runs," Staff Reports 274, Federal Reserve Bank of New York.
  4. 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.
  5. Andolfatto, David, 2007. "Bank Incentives, Contract Design, and Bank Runs," MPRA Paper 8146, University Library of Munich, Germany.
  6. 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.
  7. James Peck & Karl Shell, 2003. "Equilibrium Bank Runs," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 103-123, February.
  8. Edward J. Green & Ping Lin, 2000. "Diamond and Dybvig's classic theory of financial intermediation : what's missing?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-13.
  9. Cooper, Russell & Ross, Thomas W., 1998. "Bank runs: Liquidity costs and investment distortions," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 27-38, February.
  10. Neil Wallace, 1990. "A banking model in which partial suspension is best," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 11-23.
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