A Macroeconomic Model of Bank Runs

Abstract

We present a dynamic general equilibrium model of bank runs where global games are utilized as the equilibrium selection criterion. Coordination failures among bank creditors lead to panic-based runs. An endogenous borrowing constraint emerges as banks internalize the impact of their leverage decisions on the run probability. Our analyses suggest that runs triggered by panics impose a significant cost on the aggregate economy while those driven solely by fundamentals have almost negligible impacts. We highlight the quantitative importance of equilibrium selection criteria for our counterfactual results.

JEL Classification: E32, G01