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Working Paper
Endogenous credit cycles
We study models of credit with limited commitment, which implies endogenous borrowing constraints. We show that there are multiple stationary equilibria, as well as nonstationary equilibria, including some that display deterministic cyclic and chaotic dynamics. There are also stochastic (sunspot) equilibria, in which credit conditions change randomly over time, even though fundamentals are deterministic and stationary. We show this can occur when the terms of trade are determined by Walrasian pricing or by Nash bargaining. The results illustrate how it is possible to generate equilibria with ...
Working Paper
Diamond-Dybvig and Beyond: On the Instability of Banking
Are financial intermediaries—in particular, banks—inherently unstable or fragile, and if so, why? We address this question theoretically by analyzing whether model economies with financial intermediation are more prone than those without it to multiple, cyclic, or stochastic equilibria. We consider several formalizations: insurance-based banking, models with reputational considerations, those with fixed costs and delegated investment, and those where bank liabilities serve as payment instruments. Importantly for the issue at hand, in each case banking arrangements arise endogenously. ...
Journal Article
Withdrawal history, private information, and bank runs
This paper provides a simple two-depositor, two-stage model to understand how a bank?s withdrawal history affects an individual?s decision about withdrawals, which could possibly trigger bank runs. Individual depositors have private information about their personal consumption types and receive noisy private signals about the quality of the bank?s portfolio. Depositors make publicly observable withdrawal decisions in sequence. Computed examples indicate that the optimal contract contingent on withdrawal histories can tolerate bank runs. These runs are triggered by unfavorable signals about a ...