Exogenous Shocks, Deposit Runs and Bank Soundness: A Macroeconomic Framework

31 Pages Posted: 15 Feb 2006

See all articles by Mario I. Blejer

Mario I. Blejer

Central Bank of Argentina

Ernesto V. Feldman

International Monetary Fund (IMF)

Andrew Feltenstein

Georgia State University - Department of Economics

Date Written: July 1997

Abstract

In a model where all banks are initially solvent, an exogenous shock affects confidence, causing a flight from deposits into domestic and foreign currency. Real interest rates increase unexpectedly, affecting firms and raising the share of the banks` nonperforming assets. This increase causes genuine solvency problems and accelerates the bank run. Policy simulations show that compensatory monetary policy (increasing currency supply when deposits fall) mitigates the bank run but causes inflation and external imbalances. Combining compensatory monetary policy with tight fiscal policies also slows the bank run and mitigates insolvency, but at a lower macroeconomic cost. A devaluation is shown to have little positive impact.

JEL Classification: D58, E42, G21

Suggested Citation

Blejer, Mario I. and Feldman, Ernesto V. and Feltenstein, Andrew, Exogenous Shocks, Deposit Runs and Bank Soundness: A Macroeconomic Framework (July 1997). IMF Working Paper No. 97/91, Available at SSRN: https://ssrn.com/abstract=882601

Mario I. Blejer (Contact Author)

Central Bank of Argentina

Reconquista 266
Edificio Central, piso 7
Buenos Aires, 1003
Argentina

Ernesto V. Feldman

International Monetary Fund (IMF)

700 19th Street NW
Washington, DC 20431
United States

Andrew Feltenstein

Georgia State University - Department of Economics ( email )

P.O. Box 3992
Atlanta, GA 30302-3992
United States
404-4130093 (Phone)

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