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Banking, liquidity, and bank runs in an infinite horizon economy

Author(s): Gertler, M; Kiyotaki, Nobuhiro

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Abstract: © 2015, American Economic Association. All rights reserved. We develop an infinite horizon macroeconomic model of banking that allows for liquidity mismatch and bank runs. Whether a bank run equilibrium exists depends on bank balance sheets and an endogenous liquidation price for bank assets. While in normal times a bank run equilibrium may not exist, the possibility can arise in recessions. A run leads to a significant contraction in intermediation and aggregate economic activity. Anticipations of a run have harmful effects on the economy even if the run does not occur. We illustrate how the model can shed light on some key aspects of the recent financial crisis.
Publication Date: Jul-2015
Citation: Gertler, M, Kiyotaki, N. (2015). Banking, liquidity, and bank runs in an infinite horizon economy. American Economic Review, 105 (7), 2011 - 2043. doi:10.1257/aer.20130665
DOI: doi:10.1257/aer.20130665
ISSN: 0002-8282
Pages: 2011 - 2043
Type of Material: Journal Article
Journal/Proceeding Title: American Economic Review
Version: Final published version. Article is made available in OAR by the publisher's permission or policy.

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