Hostname: page-component-5b777bbd6c-vfh8q Total loading time: 0 Render date: 2025-06-22T19:22:10.987Z Has data issue: false hasContentIssue false
  • English
  • Français

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
Get access Rights & Permissions [Opens in a new window]

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

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

REFERENCES

Allen, Franklin and Gale, Douglas (1994) Limited market participation and volatility of asset prices. American Economic Review 84, 933–955.Google Scholar
Allen, Franklin and Gale, Douglas (1998) Optimal financial crises. Journal of Finance 53, 1245–1284.CrossRefGoogle Scholar
Angeletos, George-Marios (2008) Idiosyncratic Sentiments and Coordination Failures. MIT Department of Economics working paper 08–12.CrossRefGoogle Scholar
Aumann, Robert (1987) Correlated equilibrium as an expression of Bayesian rationality. Econometrica 55, 1–18.CrossRefGoogle Scholar
Boyd, John, Gomis, Pedro, Kwak, Sungkyu, and Smith, Bruce (2001) A User's Guide to Banking Crises. University of Texas working paper.Google Scholar
Bryant, John (1980) A model of reserves, bank runs, and deposit insurance. Journal of Banking and Finance 4, 335–344.CrossRefGoogle Scholar
Calomiris, Charles and Gorton, Gary (1991) The origins of banking panics, models, facts and banking regulation. In Hubbard, Glenn (ed.), Financial Markets and Financial Crises, pp. 93–163. Chicago: University of Chicago Press.Google Scholar
Carlsson, Hans and Eric van Damme (1993) Global games and equilibrium selection. Econometrica 61, 989–1018.CrossRefGoogle Scholar
Cooper, Russell and Ross, Thomas (1998) Bank runs: Liquidity costs and investment distortions. Journal of Monetary Economics 41, 27–38.CrossRefGoogle Scholar
Diamond, Douglas and Dybvig, Philip (1983) Bank runs, deposit insurance, and liquidity. Journal of Political Economy 91, 401–419.CrossRefGoogle Scholar
Ennis, Huberto (2003) Economic fundamentals and bank runs. Federal Reserve Bank of Richmond Economic Quarterly 89 (2), 55–71.Google Scholar
Ennis, Huberto and Keister, Todd (2006) Bank runs and investment decisions revisited. Journal of Monetary Economics 53, 217–232.CrossRefGoogle Scholar
Ennis, Huberto and Keister, Todd (2009) Run equilibria in the Green–Lin model of financial intermediation. Journal of Economic Theory 144, 1996–2020.CrossRefGoogle Scholar
Goldstein, Itay and Pauzner, Ady (2005) Demand–deposit contracts and the probability of bank runs. Journal of Finance 60, 1293–1327.CrossRefGoogle Scholar
Gorton, Gary (1988) Bank panics and business cycles. Oxford Economic Papers 40, 751–781.CrossRefGoogle Scholar
Green, Edward and Lin, Ping (2003) Implementing efficient allocations in a model of financial intermediation. Journal of Economic Theory 109, 1–23.CrossRefGoogle Scholar
Gu, Chao (2010) Herding and Bank Runs. University of Missouri working paper WP 10-6.Google Scholar
Kelly, Morgan and O'Grada, Cormac (2000) Market contagion: Evidence from the panics of 1854 and 1857. American Economic Review 90, 1110–1124.CrossRefGoogle Scholar
Manuelli, Rodolfo and Peck, James (1992) Sunspot-like effects of random endowments. Journal of Economic Dynamics and Control 16, 193–206.CrossRefGoogle Scholar
Morris, Stephen and Shin, Hyun S. (1998) Unique equilibrium in a model of self-fulfilling currency attacks. American Economic Review 88, 587–597.Google Scholar
Peck, James and Shell, Karl (2003) Equilibrium bank runs. Journal of Political Economy 111, 103–123.CrossRefGoogle Scholar
Postlewaite, Andrew and Vives, Xavier (1987) Bank runs as an equilibrium phenomenon. Journal of Political Economy 95, 485–491.CrossRefGoogle Scholar
Solomon, Raphael (2003) Anatomy of a Twin Crisis. Bank of Canada working paper 2003–41.Google Scholar
Solomon, Raphael (2004) When Bad Things Happen to Good Banks: Contagious Bank Runs and Currency Crises. Bank of Canada working paper 2004–18.Google Scholar
Wallace, Neil (1988) Another attempt to explain an illiquid banking system: The Diamond and Dybvig model with sequential service taken seriously. Federal Reserve Bank Minneapolis Quarterly Review 12, 3–16.Google Scholar
Wallace, Neil (1990) A banking model in which partial suspension is best. Federal Reserve Bank Minneapolis Quarterly Review 14, 11–23.Google Scholar