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NOISY SUNSPOTS AND BANK RUNS

Published online by Cambridge University Press:  10 June 2010

Chao Gu
Chao Gu*
Affiliation:
University of Missouri
*
Address correspondence to: Chao Gu, Department of Economics, University of Missouri, 118 Professional Building, Columbia, MO 65211, USA; e-mail: guc@missouri.edu
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Abstract

In the existing literature, panic-based bank runs are triggered by a commonly acknowledged and observed sunspot signal. There are only two equilibrium realizations resulting from the commonly observed sunspot signal: Everyone runs or no one runs. I consider a more general and more realistic situation in which consumers observe noisy private sunspot signals. If the noise in the signals is sufficiently small, there exists a proper correlated equilibrium for some demand deposit contracts. A full bank run, a partial bank run (in which some consumers panic whereas others do not), or no bank run occurs, depending on the realization of the sunspot signals. If the probabilities of runs are small, the optimal demand deposit contract tolerates full and partial bank runs.

Keywords

Sunspot EquilibriumCorrelated EquilibriumImperfect CoordinationImperfect Information

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Type
Articles
Information
Macroeconomic Dynamics , Volume 15 , Issue 3 , June 2011 , pp. 398 - 418
Copyright
Copyright © Cambridge University Press 2010

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