The Journal of Finance

A Model of Systemic Bank Runs

Published: 02/08/2023   |   DOI: 10.1111/jofi.13213

XUEWEN LIU

We develop a tractable model of systemic bank runs. The market‐based banking system features a two‐layer structure: banks with heterogeneous fundamentals face potential runs by their creditors while they trade short‐term funding in the asset (interbank) market in response to creditor withdrawals. The possibility of a run on a particular bank depends on its assets' interim liquidation value, and this value depends endogenously in turn on the status of other banks in the asset market. The within‐bank coordination problem among creditors and the cross‐bank price externality feed into each other. A small shock can be amplified into a systemic crisis.

Financial Markets, the Real Economy, and Self‐Fulfilling Uncertainties

Published: 02/17/2019   |   DOI: 10.1111/jofi.12764

JESS BENHABIB, XUEWEN LIU, PENGFEI WANG

We develop a model of informational interdependence between financial markets and the real economy, linking economic uncertainty to information production and aggregate economic activities in general equilibrium. The mutual learning between financial markets and the real economy creates a strategic complementarity in their information production, leading to self‐fulfilling surges in economic uncertainties. In a dynamic setting, our model characterizes self‐fulfilling uncertainty traps with two steady‐state equilibria and a two‐stage economic crisis in transitional dynamics.