Money runs

Jason Roderick Donaldson and Giorgia Piacentino

Journal of Monetary Economics, 2022, vol. 126, issue C, 35-57

Abstract: In this paper, we develop a model that links the funding role of bank debt in the primary market to its circulation in the secondary market. We uncover a new rationale for why banks do what they do. Banks choose to fund themselves with demandable debt because it commands a high price, even though doing so exposes them to “money runs” resulting from its failure to circulate. In the model, banks endogenously perform the essential functions of real-world banks: they transform liquidity, transform maturity, pool assets, and have dispersed depositors. We show novel effects of suspension of convertibility.

Keywords: Banking; Security design; Private money; Financial fragility; Suspension of convertibility (search for similar items in EconPapers)
JEL-codes: D86 E41 E51 G21 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:126:y:2022:i:c:p:35-57

DOI: 10.1016/j.jmoneco.2021.11.007

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