Exogenous Shocks, Deposit Runs and Bank Soundness: A Macroeconomic Framework

Author/Editor:

Mario I. Bléjer

Publication Date:

July 1, 1997

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

In a model where all banks are initially solvent, an exogenous shock affects confidence, causing a flight from deposits into domestic and foreign currency. Real interest rates increase unexpectedly, affecting firms and raising the share of the banks’ nonperforming assets. This increase causes genuine solvency problems and accelerates the bank run. Policy simulations show that compensatory monetary policy (increasing currency supply when deposits fall) mitigates the bank run but causes inflation and external imbalances. Combining compensatory monetary policy with tight fiscal policies also slows the bank run and mitigates insolvency, but at a lower macroeconomic cost. A devaluation is shown to have little positive impact.

Series:

Working Paper No. 1997/091

Subject:

English

Publication Date:

July 1, 1997

ISBN/ISSN:

9781451951738/1018-5941

Stock No:

WPIEA0911997

Pages:

31

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