NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Bank Runs in Open Economies and The International Transmission of Panics

Peter M. Garber, Vittorio U. Grilli

NBER Working Paper No. 2764
Issued in November 1988
NBER Program(s):   ITI   ME   IFM

In this paper, we extend the bank run literature to an open economy model. We show that a foreign banking system, by raising deposit rates in the presence of a domestic banking panic, may generate sufficient liquid resources to acquire assets sold by the domestic banking system at bargain prices. In this case, foreign depositors will benefit from the domestic panic. We also show that our simple model is able to generate the spreading of panics. Perhaps not surprisingly, the crucial element in determining the propagation of financial crises is the effect of interest rates on savings decisions.

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Document Object Identifier (DOI): 10.3386/w2764

Published: Journal of International Economics, Vol. 27, nos. 1/2 (1989): 165-176.

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