Aftermath of Banking Crises: Effectson Real and Monetary Variables

In this paper a simple optimizing model is developed to analyze the implications of a banking crisis. Banks are incorporated by assuming that they intermediate funds between firms and households. It is shown that when depositors perceive the quality of deposits to have deteriorated, they switch from deposits to cash. Because of the higher cost of liquidity, consumption, M2 and the M2 multiplier decline, interest rates on deposits and loans increase and output contracts. The findings of the paper match the key stylized facts of banking crises.
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Volume/Issue: Volume 2000 Issue 096
Publication date: June 2000
ISBN: 9781451851908
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Topics covered in this book

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Business and Economics , Banks and Banking , Economics- Macroeconomics , Money and Monetary Policy , WP , current account , economic activity , opportunity cost , present discounted value , Banking Crisis , substitution effect , open economy , cash reserves , liquidity of deposit , deposits withdrawal , lending-to-deposit interest rate , money multiplier , bank credit line , effective demand , deposit guarantee , Consumption , Currencies , Banking crises , Bank credit , Credit , East Asia

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Summary

In this paper a simple optimizing model is developed to analyze the implications of a banking crisis. Banks are incorporated by assuming that they intermediate funds between firms and households. It is shown that when depositors perceive the quality of deposits to have deteriorated, they switch from deposits to cash. Because of the higher cost of liquidity, consumption, M2 and the M2 multiplier decline, interest rates on deposits and loans increase and output contracts. The findings of the paper match the key stylized facts of banking crises.

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