TAILIEUCHUNG - Economics and Liberating Theory - Part 9

9 Macro Economic Models This chapter contains some simple models that illustrate important themes in banking, macro economics, and international finance. It is the last of three technical chapters that are not necessary to understand the rest of the book. | 9 Macro Economic Models This chapter contains some simple models that illustrate important themes in banking macro economics and international finance. It is the last of three technical chapters that are not necessary to understand the rest of the book. As before readers who want to be able to analyze economic problems themselves are encouraged to read this chapter. BANK RUNS That is my money inside that bank mine cried Ramona Ruiz 67 a retired textile worker who was trying to withdraw funds from an ATM in the city center of Buenos Aires today only to find it empty. I was being patriotic by not removing my savings earlier. And now I see what a fool I was. 1 Two people deposit D in a The bank lends these deposits 2D to a borrower who if all goes well will repay the bank 2R on a future date 2 where R D. On the other hand if the bank is forced to sell this loan asset to another bank on some date 1 before date 2 it will only receive 2r from the sale of the loan where 2D 2r D. Depositors can withdraw their money on either date 1 or date 2. For simplicity we assume depositors have a zero rate of time discount . if the amount of money is the same the depositors don t care if they get it on date 1 or date 2. If even one depositor withdraws on date 1 the bank has to liquidate its loan because it has nothing to repay either depositor on date 1 without doing so receiving 2r from the sale of the loan. If both depositors withdraw on date 1 each gets half of what the bank 1. Quoted in Argentina Restricts Bank Withdrawals by Anthony Faiola Washington Post December 2 2001 A30. 2. This model is adapted from an excellent book by Robert Gibbons Game Theory for Applied Economists Princeton University Press 1992. 208 Macro Economic Models 209 has r which is less than each deposited D. If one withdraws on date 1 but the other does not the one who withdraws gets D while the other one gets the remainder 2r - D which is not only less than D but less than r as well. If neither .

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