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

Mark Gertler, Nobuhiro Kiyotaki

Research output: Contribution to journalReview article

63 Scopus citations

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

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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