Banking Panics and Output Dynamics

Daniel Sanches

No 17-20, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: This paper develops a dynamic general equilibrium model with an essential role for an illiquid banking system to investigate output dynamics in the event of a banking crisis. In particular, it considers the ex-post efficient policy response to a banking crisis as part of the dynamic equilibrium analysis. 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 the liquidation cost, the recession associated with a banking panic is protracted as a result of the premature liquidation of a large fraction of productive banking assets to respond to a panic. 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.

Keywords: Banking panic; deposit contract; suspension of convertibility; time-consistent policies (search for similar items in EconPapers)
JEL-codes: E32 E42 G21 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2017-07-24
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.philadelphiafed.org/-/media/frbp/asset ... ers/2017/wp17-20.pdf (application/pdf)

Related works:
Journal Article: Banking Panics and Output Dynamics (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:17-20

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Philadelphia Contact information at EDIRC.
Bibliographic data for series maintained by Beth Paul ().