Modeling Bank Panics: Challenges

Lawrence Christiano, Husnu Dalgic and Xiaoming Li

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: Our primary finding is that surprisingly small changes in assumptions which determine the amount of net worth available in a bank panic have an important impact on the nature of the equilibria: there may not be a bank panic at all, or there may be several di erent panics of di erent severity. The economic reasons for this sensitivity are clarified by transforming the market economy into a game and studying banker best response functions. To establish robustness to model details, we report similar quantitative results across three di erent model specifications and calibrations. A second, additional result, is displayed in a three-period version of the panic model of Gertler and Kiyotaki (2015). That model naturally suggests the idea that welfare can be improved by imposing a restriction on bank leverage. We compute the Ramsey-optimal leverage restriction, but find that there is an implementation problem: the restriction can be associated with more than one equilibrium, not just the desired one. We discuss one way to address the implementation problem.

Keywords: Bank runs; financial crises; macroprudential policy (search for similar items in EconPapers)
JEL-codes: E44 G01 G21 (search for similar items in EconPapers)
Pages: 79
Date: 2022-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-fdg, nep-gth, nep-mac and nep-mon
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Working Paper: Modeling the Great Recession as a Bank Panic: Challenges (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2022_343

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