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A Model of Bank-Note Runs

Author

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  • Hajime Tomura

    (Faculty of Political Science and Economics, Waseda University)

Abstract

This paper presents a three-period model to endogenize the need for bank notes given the availability of trade credit. The model shows that banks can improve risk sharing in the economy by discounting commercial bills to issue bank notes, because bank notes can serve as payment instruments backed by a diversified pool of commercial bills issued by payers. This characteristic of bank notes, however, can cause a self-fulfilling mass refusal of bank notes by payees due to endogenous default on commercial bills. This result holds even if bank notes are not redeemable on demand before maturity. The model shows that a capital requirement is not sufficient for preventing a self-fulfilling mass refusal of bank notes, while a reserve requirement is.

Suggested Citation

  • Hajime Tomura, 2020. "A Model of Bank-Note Runs," Working Papers 1922, Waseda University, Faculty of Political Science and Economics.
    • Handle: RePEc:wap:wpaper:1922
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Bank notes; Trade credit; Commercial bills; Bank run; Reserves; Payment system;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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