Bank runs, welfare and policy implications

This paper proposes a model in which bank runs are closely related to the state
of the business cycle. The benchmark model shows that, in a market economy,
there are welfare losses due to the existence of bank runs. Extensions of the
model explore the welfare effects of various government policies. The results
suggest that an interest-cap deposit insurance scheme is an efficient policy to
prevent bank runs, while other policies, including the suspension of
convertibility, a penalty on short-term deposits and full-coverage deposit
insurance schemes, will all have adverse side effects.