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

Mark Gertler, Nobuhiro Kiyotaki

    Research output: Contribution to journalReview article

    Abstract

    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.

    Original languageEnglish (US)
    Pages (from-to)2011-2043
    Number of pages33
    JournalAmerican Economic Review
    Volume105
    Issue number7
    DOIs
    StatePublished - Jul 1 2015

    Fingerprint

    Liquidity
    Banking
    Bank runs
    Infinite horizon
    Anticipation
    Financial crisis
    Balance sheet
    Mismatch
    Macroeconomic models
    Assets
    Recession
    Contraction
    Intermediation
    Economic activity
    Liquidation

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    Banking, liquidity, and bank runs in an infinite horizon economy. / Gertler, Mark; Kiyotaki, Nobuhiro.

    In: American Economic Review, Vol. 105, No. 7, 01.07.2015, p. 2011-2043.

    Research output: Contribution to journalReview article

    Gertler, Mark ; Kiyotaki, Nobuhiro. / Banking, liquidity, and bank runs in an infinite horizon economy. In: American Economic Review. 2015 ; Vol. 105, No. 7. pp. 2011-2043.
    @article{ebc4d3431ccc40f18ed0481ed58c40d2,
    title = "Banking, liquidity, and bank runs in an infinite horizon economy",
    abstract = "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.",
    author = "Mark Gertler and Nobuhiro Kiyotaki",
    year = "2015",
    month = "7",
    day = "1",
    doi = "10.1257/aer.20130665",
    language = "English (US)",
    volume = "105",
    pages = "2011--2043",
    journal = "American Economic Review",
    issn = "0002-8282",
    publisher = "American Economic Association",
    number = "7",

    }

    TY - JOUR

    T1 - Banking, liquidity, and bank runs in an infinite horizon economy

    AU - Gertler, Mark

    AU - Kiyotaki, Nobuhiro

    PY - 2015/7/1

    Y1 - 2015/7/1

    N2 - 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.

    AB - 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.

    UR - http://www.scopus.com/inward/record.url?scp=84937604237&partnerID=8YFLogxK

    UR - http://www.scopus.com/inward/citedby.url?scp=84937604237&partnerID=8YFLogxK

    U2 - 10.1257/aer.20130665

    DO - 10.1257/aer.20130665

    M3 - Review article

    AN - SCOPUS:84937604237

    VL - 105

    SP - 2011

    EP - 2043

    JO - American Economic Review

    JF - American Economic Review

    SN - 0002-8282

    IS - 7

    ER -