Template-Type: ReDIF-Paper 1.0
Title: Modeling Bank Panics: Challenges
Author-Name: Lawrence Christiano 
Author-Email:l-christiano@northwestern.edu
Author-Name: Husnu Dalgic
Author-Email:hdalgic@mail.uni-mannheim.de   
Author-Name: Xiaoming Li
Author-Email: 


Classification-JEL: E44, G01, G21
Keywords:  Bank runs, financial crises, macroprudential policy

Abstract: Our primary finding is that surprisingly small changes in assumptions
which determine the amount of net worth available in a bank panic have an
important impact on the nature of the equilibria: there may not be a bank
panic at all, or there may be several dierent panics of dierent severity.
The economic reasons for this sensitivity are clarified by transforming the
market economy into a game and studying banker best response functions.
To establish robustness to model details, we report similar quantitative results
across three dierent model specifications and calibrations. A second,
additional result, is displayed in a three-period version of the panic model of
Gertler and Kiyotaki (2015). That model naturally suggests the idea that
welfare can be improved by imposing a restriction on bank leverage. We
compute the Ramsey-optimal leverage restriction, but find that there is an
implementation problem: the restriction can be associated with more than
one equilibrium, not just the desired one. We discuss one way to address
the implementation problem.

Note: 
Length: 79
Creation-Date: 2022-03
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp343
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2022_343