Skip to main content

Banking Panics, Information, and Rational Expectations Equilibrium

Working Paper 320 | Revised February 1, 1988

Download PDF

Authors

Ravi Jagannathan

Banking Panics, Information, and Rational Expectations Equilibrium

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.


Published In: Credit, intermediation, and the macroeconomy: Readings and perspectives in modern financial theory (2004, pp. 265-279)
Published In: Journal of Finance (Vol. 43, No. 3, July 1988, pp. 749-61) https://doi.org/10.2307/2328198

Download Paper (pdf)