Private money and bank runs

Private money and bank runs

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Article ID: iaor201111976
Volume: 44
Issue: 3
Start Page Number: 859
End Page Number: 879
Publication Date: Aug 2011
Journal: Canadian Journal of Economics/Revue canadienne d'conomique
Authors: ,
Keywords: investment, finance & banking, simulation, behaviour
Abstract:

This paper studies bank runs in a model with private money. We show that allowing claims on demand deposits to circulate as a medium of exchange can help prevent bank runs. In our model, there exists a unique banking equilibrium where no one demands early withdrawals of real goods and agents in need of liquidity use private money to finance consumption. With private money, the unique equilibrium not only eliminates bank runs but also improves banking efficiency. The implications of our model are consistent with the evidence from the banking history of the United States.

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