Banking, Liquidity and Bank Runs in an Infinite-Horizon Economy

43 Pages Posted: 18 Jun 2013

See all articles by Mark Gertler

Mark Gertler

New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

Nobuhiro Kiyotaki

Princeton University - Department of Economics

Date Written: June 2013

Abstract

We develop a variation of the macroeconomic model with banking in Gertler and Kiyotaki (2011) that allows for liquidity mismatch and bank runs as in Diamond and Dybvig (1983). As in Gertler and Kiyotaki, because bank net worth fluctuates with aggregate production, the spread between the expected rates of return on bank assets and deposits fluctuates counter-cyclically. However, because bank assets are less liquid than deposits, bank runs are possible as in Diamond and Dybvig. Whether a bank run equilibrium exists depends on bank balance sheets and an endogenously determined liquidation price for bank assets. While in normal times a bank run equilibrium may not exist, the possibility can arise in a recession. We also analyze the effects of anticipated bank runs. Overall, the goal is to present a framework that synthesizes the macroeconomic and microeconomic approaches to banking and banking instability.

Suggested Citation

Gertler, Mark and Kiyotaki, Nobuhiro, Banking, Liquidity and Bank Runs in an Infinite-Horizon Economy (June 2013). NBER Working Paper No. w19129, Available at SSRN: https://ssrn.com/abstract=2280980

Mark Gertler (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Nobuhiro Kiyotaki

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

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