Flight to liquidity and systemic bank runs

Roberto Robatto

No 38, ESRB Working Paper Series from European Systemic Risk Board

Abstract: This paper presents a general equilibrium, monetary model of 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 in 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 much smaller. JEL Classification: E44, E51, G20

Keywords: Bank Runs; Endogenous Money Velocity; Flight to Liquidity; Great Depression; Great Recession; Monetary Injections; Money Market Mutual Funds (search for similar items in EconPapers)
Date: 2017-03
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:srk:srkwps:201738

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