The Diamond-Rajan Bank Runs in a Production Economy

Keiichiro Kobayashi

No 515, PIE/CIS Discussion Paper from Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University

Abstract: To analyze the macroeconomic consequences of a systemic bank run, we integrate the banking model `a la Diamond and Rajan (2001a) into a simplified version of an infinite-horizon neoclassical growth model. The banking sector intermediates the collateral-secured loans from households to entrepreneurs. The entrepreneurs also deposit their working capital in the banks. The systemic bank run, which is a sunspot phenomenon in this model, results in a deep recession through causing a sudden shortage of the working capital. We show that an increase in the probability of occurrence of the systemic run can persistently lower output, consumption, labor, capital and the asset price, even if the systemic run does not actually occur. This result implies that the slowdown of economic growth after the financial crises may be caused by the increased fragility of the banking system or the raised fears of recurrence of the systemic runs.

Pages: 31 pages
Date: 2011-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-fdg
Note: March 2011 (First draft: September 30, 2010)
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Journal Article: Diamond-Rajan Bank Runs in a Production Economy (2013)
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