Flight to Liquidity and Systemic Bank Runs

Roberto Robatto
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Roberto Robatto: University of Wisconsin-Madison

No 276, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: This paper presents a general equilibrium monetary model of fundamentals-based bank runs to study monetary injections during financial crises. When the probability of runs is positive, depositors increase money demand and reduce deposits; at the economy-wide level, the velocity of money drops and deflation arises. Two quantitative examples show that the model accounts for a large fraction of (i) the drop in deposits during the Great Depression and (ii) the $400 billion run on money market mutual funds in September 2008. In some circumstances, monetary injections have no effects on prices but reduce money velocity and deposits. Counterfactual policy analyses show that, if the Federal Reserve had not intervened in September 2008, the run on money market mutual funds would have been $141 billion smaller.

Date: 2018
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:276

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