Banking Panics and Output Dynamics

Daniel Sanches

Review of Economic Dynamics, 2018, vol. 29, 148-171

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. (Copyright: Elsevier)

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)
Date: 2018
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Citations: View citations in EconPapers (6)

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DOI: 10.1016/j.red.2017.12.009

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