Long-Run Inflation and Financial Panics

Nikolay Hristov and Dominik Menno

No 12918, CESifo Working Paper Series from CESifo

Abstract: We study how long-run inflation affects systemic bank-run risk in a medium-scale New Keynesian model with banks and endogenous financial panics. In the benchmark calibration, the bank-run probability more than doubles when annual trend inflation increases from zero to six percent. Higher trend inflation makes price-setting firms more forward-looking, thereby muting expected real-rate declines and amplifying the fall in asset prices during crises. The zero lower bound raises run risk only at low long-run inflation rates. Disinflationary transitions can sharply increase short-run risk, especially if a "cold turkey" disinflation is pursued. Finally, we discuss implications for monetary and macroprudential policy trade-offs.

Keywords: long-run inflation; bank runs; financial panics; crisis probability (search for similar items in EconPapers)
JEL-codes: E12 E23 E31 E32 E44 E52 G01 G21 G33 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12918

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