TY  - JOUR
AU  - Gertler, Mark
AU  - Kiyotaki, Nobuhiro
TI  - Banking, Liquidity and Bank Runs in an Infinite-Horizon Economy
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 19129
PY  - 2013
Y2  - June 2013
DO  - 10.3386/w19129
UR  - http://www.nber.org/papers/w19129
L1  - http://www.nber.org/papers/w19129.pdf
N1  - Author contact info:
Mark Gertler
Department of Economics
New York University
269 Mercer Street, 7th Floor
New York, NY 10003
Tel: 212/998-8931
Fax: 212/995-4186
E-Mail: mark.gertler@nyu.edu

Nobuhiro Kiyotaki
Department of Economics
Princeton University
Fisher Hall
Princeton, NJ 08544-1021
Tel: 609-258-4000
Fax: 609-258-6419
E-Mail: kiyotaki@princeton.edu
AB  - We develop a variation of the macroeconomic model with banking in Gertler and Kiyotaki (2011) that allows for liquidity mismatch and bank runs as in Diamond and Dybvig (1983).  As in Gertler and Kiyotaki, because bank net worth fluctuates with aggregate production, the spread between the expected rates of return on bank assets and deposits fluctuates counter-cyclically.  However, because bank assets are less liquid than deposits, bank runs are possible as in Diamond and Dybvig. Whether a bank run equilibrium exists depends on bank balance sheets and an endogenously determined liquidation price for bank assets. While in normal times a bank run equilibrium may not exist, the possibility can arise in a recession. We also analyze the effects of anticipated bank runs. Overall, the goal is to present a framework that synthesizes the macroeconomic and microeconomic approaches to banking and banking instability.
ER  -