Banking Panics, Information, and Rational Expectations Equilibrium

V. V. CHARI*, Ravi Jagannathan

*Corresponding author for this work

Research output: Contribution to journalArticle

239 Scopus citations

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. 1988 The American Finance Association

Original languageEnglish (US)
Pages (from-to)749-761
Number of pages13
JournalThe Journal of Finance
Volume43
Issue number3
DOIs
StatePublished - Jan 1 1988

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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