Banking Panics and Output Dynamics
Daniel Sanches ()
No 17-20, Working Papers from Federal Reserve Bank of Philadelphia
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)
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
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Journal Article: Banking Panics and Output Dynamics (2018)
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