Banking panics and protracted recessions

Daniel Sanches

No 15-39, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: This paper develops a dynamic model of bank liquidity provision to characterize the ex post efficient policy response to a banking panic and study its implications for the behavior of output in the aftermath of a panic. It is shown that the trajectory of real output following a panic episode crucially depends on the cost of converting long-term assets into liquid funds. For small values of this liquidation cost, the recession associated with a banking panic is protracted. For intermediate values, the recession is more severe but short lived. For relatively large values, the contemporaneous decline in real output in the event of a panic is substantial but followed by a vigorous rebound in real activity above the long-run level. The author argues that these theoretical predictions are consistent with the observed disparity in crisis-related output losses.

Keywords: Banking panic; Deposit contract; Suspension of convertibility; Time-consistent policy (search for similar items in EconPapers)
JEL-codes: E32 E42 G21 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2015-10-21
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Banking panics and protracted recessions (2014)
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