Banking Panics and Policy Responses
Title: Banking Panics and Policy Responses
Publisher: Elsevier Science Bv
Citation: Journal of Monetary Economics, 2010, 57, 4, 404-419
When policy makers have limited commitment power, self-fulfilling bank runs can arise as an equilibrium phenomenon. We study how such banking panics unfold in a version of the Diamond and Dybvig (1983) model. A run in this setting is necessarily partial, with only some depositors participating. In addition, a run naturally occurs in waves, with each wave of withdrawals prompting a further response from policy makers. In this way, the interplay between the actions of depositors and the responses of policy makers shapes the course of a crisis. (C) 2010 Elsevier B.V. All rights reserved.
Subject: Bank runs; Limited commitment; Time consistency; Suspension of convertibility
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