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

    ASJC Scopus subject areas

    • Economics and Econometrics

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