international finance

1 The History of Bank Runs Read https://www.frbatlanta.org//media/docu1nents/filelegacydocs/ernSQOtallman. pdf. As you read write down the following: 1. What were some of the economic reasons people lost trust in their deposits? 2. What were some of the non-economic reasons? Or to put it another way, why did it turn into a panic? 3. What were some of the actions taken to reassure the public during the crisis? 4. What was the major policy change that was the result of this panic? 2 Bank Runs Consider the Diamond-Dybvig model we learned in class. Suppose the bank thinks that A = %, so that half of the investors will need their money. The bank has access to a loan that will pay R = 2 in the second period, so they invest the other half in that project. If 1 they have to liquidate in the rst period, then the project only returns a = 5. 1. Suppose, for now, that the bank is correct. And suppose there is no run. How much does each agent get? 2. Now suppose there is a run. How much does each agent get in this scenario? * UIUC 3. Suppose however, that the bank is wrong, and that actually A = .55. How much of the project does the bank have to liquidate, even if only people that need the money show up? 4. How much of the project is left afterward? How much does each patient agent get? 5. What is the maximum A before there will denitely be a run? i.e. what A means that the returns to people waiting are always lower than the returns to people who withdraw early