Banking Panics, Information, and Rational Expectations Equilibrium

Authors

  • V. V. CHARI,

  • RAVI JAGANNATHAN

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    • Chari, Federal Reserve Bank of Minneapolis; Jagannathan, J. L. Kellogg Graduate School of Management, Northwestern University, and University of Minnesota. The authors are deeply indebted to Larry E. Jones. We also wish to thank the seminar participants at Northwestern University, the University of Chicago, and the Twentieth Annual Conference of the Western Finance Association, where earlier versions of this paper were presented. Chari's research was supported by the Banking Research Center, Northwestern University. Jagannathan's research was supported by a grant from the McKnight foundation to the University of Minnesota. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System


ABSTRACT

This paper shows that bank runs can be modeled as an equilibrium phenomenon. We demonstrate that some aspects of the intuitive “story” that bank runs start with fears of insolvency of banks can be rigorously modeled. If individuals observe long “lines” at the bank, they correctly infer that there is a possibility that the bank is about to fail and precipitate a bank run. However, bank runs occur even when no one has any adverse information. Extra market constraints such as suspension of convertibility can prevent bank runs and result in superior allocations.

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