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Preventing bank runs

2017; Econometric Society; Volume: 12; Issue: 3 Linguagem: Inglês

10.3982/te1970

1933-6837

David Andolfatto, Ed Nosal, Bruno Sultanum,

Monetary Policy and Economic Impact

Theoretical EconomicsVolume 12, Issue 3 p. 1003-1028 Original ArticlesOpen Access Preventing bank runs David Andolfatto, David Andolfatto David.Andolfatto@stls.frb.org Research Department, Federal Reserve Bank of St. Louis Economics Department, Simon Fraser UniversitySearch for more papers by this authorEd Nosal, Ed Nosal ed.nosal@gmail.com Research Department, Federal Reserve Bank of ChicagoSearch for more papers by this authorBruno Sultanum, Bruno Sultanum bruno@sultanum.com Research Department, Federal Reserve Bank of Richmond Any opinions or views expressed in this article are not necessarily those of the Federal Reserve Banks of Chicago, Richmond, or St. Louis, or of the Federal Reserve System. This work was funded, in part, by the Social Sciences and Humanities Council of Canada. We thank Ricardo Cavalcanti, Russell Cooper, Edward Green, Giuseppe Moscarini, Ruilin Zhou, Neil Wallace and anonymous referees for many valuable comments and suggestions. Search for more papers by this author David Andolfatto, David Andolfatto David.Andolfatto@stls.frb.org Research Department, Federal Reserve Bank of St. Louis Economics Department, Simon Fraser UniversitySearch for more papers by this authorEd Nosal, Ed Nosal ed.nosal@gmail.com Research Department, Federal Reserve Bank of ChicagoSearch for more papers by this authorBruno Sultanum, Bruno Sultanum bruno@sultanum.com Research Department, Federal Reserve Bank of Richmond Any opinions or views expressed in this article are not necessarily those of the Federal Reserve Banks of Chicago, Richmond, or St. Louis, or of the Federal Reserve System. This work was funded, in part, by the Social Sciences and Humanities Council of Canada. We thank Ricardo Cavalcanti, Russell Cooper, Edward Green, Giuseppe Moscarini, Ruilin Zhou, Neil Wallace and anonymous referees for many valuable comments and suggestions. Search for more papers by this author First published: 22 September 2017 https://doi.org/10.3982/TE1970Citations: 10 AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Abstract The work of Diamond and Dybvig, 1983 is commonly understood as a theory of bank runs driven by self-fulfilling prophecies. Their contribution may alternatively be interpreted as a theory for preventing these bank runs. Absent aggregate risk over liquidity demand, they show that a simple scheme that suspends withdrawls when a target level of bank reserves is reached implements the efficient allocation as the unique equilibrium. Uniqueness implies that there cannot be a bank-run equilibrium. Unfortunately, this scheme cannot implement the efficient allocation when there is aggregate uncertainty over every possible liquidity demand because any realization of liquidity demand may, in this case, be determined by fundamentals instead of psychology. When there is aggregate risk, Peck and Shell, 2003 demonstrate that the constrained efficient allocation can be implemented by a direct mechanism as an equilibrium. They show that the same mechanism can also implement a bank-run equilibrium, which suggests that Diamond and Dybvig, 1983 can be understood as a theory of bank runs. The use of direct mechanisms, however, imposes a severe restriction on communications. We propose an indirect mechanism that (i) permits depositors to communicate their beliefs, not just their types, (ii) incentivizes depositors to communicate "rumors" of an impending bank run, and (iii) threatens to suspend payments conditional on what is revealed in these communications. We demonstrate that if commitment is possible, then under some weak parameter restrictions our indirect mechanism uniquely implements an allocation that can be made arbitrarily close to the the constrained efficient allocation as an equilibrium. In other words, our mechanism prevents bank runs. References 1 Andolfatto, David, Ed Nosal, and Neil Wallace (2007), "The role of independence in the Green–Lin Diamond–Dybvig model." Journal of Economic Theory, 137, 709– 715. 10.1016/j.jet.2006.11.004 1 Bryant, John (1980), "A model of reserves, bank runs, and deposit insurance." 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