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Long-run inflation and financial panics

Author

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  • Hristov, Nikolay
  • Menno, Dominik

Abstract

We employ a medium-scale New Keynesian model with banks and endogenous financial panics (system-wide bank runs) to study whether and how (non-zero) average trend inflation affects the risk of bank runs. Consistent with descriptive empirical evidence for a panel of advanced economies, we find that trend inflation significantly affects the probability of banking panics - this probability more than doubles when annual trend inflation rises from 0% to 6% p.a. The incidence of a banking panic mainly depends on the magnitude of the associated decline in asset prices. With higher trend inflation this decline is stronger. The presence of an occasionally binding zero lower bound increases the likelihood of bank runs, but only for low levels of long-run inflation. Disinflations engineered by the central bank are associated with significantly higher bank-run probability in the short- run, especially when a sharp "cold turkey" disinflation is pursued. Finally, we discuss how trend inflation affects some of the trade-offs faced by monetary and macroprudential policy.

Suggested Citation

  • Hristov, Nikolay & Menno, Dominik, 2026. "Long-run inflation and financial panics," Discussion Papers 17/2026, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:343042
    DOI: 10.71734/DP-2026-17
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    Keywords

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    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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