Javier Bianchi, Federal Reserve Bank of Minneapolis
Abstract: We present a tractable dynamic macroeconomic model of self-fulfilling bank runs. A bank is vulnerable to a run when a loss of investors' confidence triggers deposit withdrawals and leads the bank to default. We characterize how the vulnerability of an individual bank depends on macroeconomic aggregates and how the number of banks facing a run affects aggregates in turn. In general equilibrium, runs can be partial or complete, depending on aggregate leverage and the dynamics of asset prices. The effectiveness of credit easing and its welfare implications depend on whether a crisis is driven by fundamentals or self-fulfilling runs.