A Model of Bank-Note Runs

Hajime Tomura

No 1922, Working Papers from Waseda University, Faculty of Political Science and Economics

Abstract: This paper presents a three-period model to endogenize the need for bank notes given the availability of trade credit. The model shows that banks can improve risk sharing in the economy by discounting commercial bills to issue bank notes, because bank notes can serve as payment instruments backed by a diversified pool of commercial bills issued by payers. This characteristic of bank notes, however, can cause a self-fulfilling mass refusal of bank notes by payees due to endogenous default on commercial bills. This result holds even if bank notes are not redeemable on demand before maturity. The model shows that a capital requirement is not sufficient for preventing a self-fulfilling mass refusal of bank notes, while a reserve requirement is.

Keywords: Bank notes; Trade credit; Commercial bills; Bank run; Reserves; Payment system (search for similar items in EconPapers)
JEL-codes: E42 G21 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2020-03
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:wap:wpaper:1922

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