Long-run inflation and financial panics

Nikolay Hristov and Dominik Menno

No 17/2026, Discussion Papers from Deutsche Bundesbank

Abstract: We employ a medium-scale New Keynesian model with banks and endogenous financial panics (system-wide bank runs) to study whether and how (non-zero) average trend inflation affects the risk of bank runs. Consistent with descriptive empirical evidence for a panel of advanced economies, we find that trend inflation significantly affects the probability of banking panics - this probability more than doubles when annual trend inflation rises from 0% to 6% p.a. The incidence of a banking panic mainly depends on the magnitude of the associated decline in asset prices. With higher trend inflation this decline is stronger. The presence of an occasionally binding zero lower bound increases the likelihood of bank runs, but only for low levels of long-run inflation. Disinflations engineered by the central bank are associated with significantly higher bank-run probability in the short- run, especially when a sharp "cold turkey" disinflation is pursued. Finally, we discuss how trend inflation affects some of the trade-offs faced by monetary and macroprudential policy.

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:zbw:bubdps:343042

DOI: 10.71734/DP-2026-17

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