Financial Crises and Systemic Bank Runs in a Dynamic Model of Banking

I present a new dynamic general equilibrium model of banking to analyze monetary policy during financial crises. A novel channel gives rise to multiple equilibria. In the good equilibrium, all banks are solvent. In the bad equilibrium, many banks are insolvent and subject to runs. The bad equilibrium is also characterized by deflation and a flight to liquidity. Some central bank interventions are more effective than others at eliminating the bad equilibrium. Interventions that do not eliminate the bad equilibrium still counteract deflation and reduce the losses of insolvent banks, but, for some parameter values, amplify the flight to liquidity.