This thesis empirically investigates the bank runs probability cases over the period 2005-2011 on Russian banking market and, simultaneously, tests the hypothesis of influence of bank-fundamental factors and macroeconomic conditions on the decision of depositors to withdraw their funds from banks. Methodologically, was conducted a logit econometric model to test our assumptions. We find evidence on both bank- fundamentals, such as high debt ratio, rising real interest rates, small asset size, and macroeconomic conditions, such as high inflation, and sharp increases in the real exchange rates, to influence on bank runs. In addition, the thesis analyzes the significance of deposit insurance implementation in avoiding bank runs. Moreover, we compare if the newly adopted deposit insurance diminished the credibility of the depositors in the state-controlled banks compared with private banks, thus, increasing the amount of investments to private banks. Finally, based on our approach, the method identifies a run on Russian deposit market during quarter four of 2008 year; however we would not characterize it as a severe run because it did not touch all banks but more as a partial one (approx. 1/3 of banks from the system were affected).

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In this dissertation, I study international financial crises. For this purpose, I build two models. In the first model, I focus on financial crises in developing, large open economies where foreign debt with various maturities and issue dates is available. The objective is to measure the vulnerability of the domestic financial system to domestically triggered bank runs and externally triggered sudden stops. The main contribution of this model is that both types of crises are treated as rational responses of domestic depositors and international creditors. Such vulnerability measures are linked to fundamentals and equilibrium term structure of foreign debt. Banks’ vulnerability to runs increases if they hold a relatively shorter term debt. Also, a larger cost of liquidating the long-term investment before maturity makes the banks more fragile. In the next step, given a domestic banking crisis, I allow international creditors to decide whether they want to stop lending to domestic banks (in which case a “sudden stop” takes place) or not. A sudden stop is more likely if (i) creditors highly discount future consumption, (ii) creditors’ current income is small relative to their future income, and (iii) the cost of liquidating the long-term investment before maturity is small. In the second model, I investigate the merits of alternative monetary policies with respect to financial fragility. In this monetary model of an explicit financial system, I motivate the demand for two fiat currencies by spatial separation and limited communication of agents. There is a domestic and a foreign currency freely traded without restrictions. I analyze the policy of a constant growth rate of domestic money supply with a floating exchange rate regime. Both currencies are held in positive amounts at the steady-state only if the growth rate of domestic money supply is equal to the world inflation rate (WIR). If the former rate is larger than the WIR, domestic currency is not held at the steady-state. Also, total real money balances held is negatively related with WIR. Finally, monetary policy in the form of a constant growth rate of domestic money supply is neutral with respect to welfare.

My research focuses on the reasons for banking crises and the corresponding policy rules that could help prevent such crises. This abstract briefly reviews the two essays in my dissertation. The first essay focuses on the optimal mechanism design of the deposit insurance system while the second essay studies the impact of international illiquidity on domestic banking crises. The Recent Deposit Insurance Reform in the U.S. raised the coverage limit for certain types of deposits. In chapter II, I study the optimal coverage limit in a model of deposit insurance in the banking system. Because of the coverage limit, depositors have incentives to monitor the bank’s risk-taking behavior, threatening banks with the withdrawal of deposits if necessary. The model includes risk-taking banks, heterogeneous depositors, and a benevolent insurance company providing deposit insurance. I find that partial coverage combined with risk-sensitive premia in the presence of capital requirements can improve social welfare and manage banks’ risktaking behavior. Moreover, when a partial coverage limit is in place, banks are better off by finding a balance between the higher premia and the depositors’ monitoring and withdrawals. Unlike chapter II, chapter III focuses on the role played by international illiquidity. I build a dynamic general equilibrium model (DGEM) of a small, open economy. The features I include in the model are nontrivial demands for fiat currencies, unanticipated sunspots, and financial/banking crises originated by sudden stops of foreign capital inflows are. This chapter gives us a better understanding of the performance of alternative exchange rate regimes and associated monetary policies under a simple setup. I show the existence of multiple equilibria that may be ranked based on the presence of binding information constraints and on welfare. Moreover, I show that a strong connection of the scope for existence and for indeterminacy of equilibria with the underlying policy regime. I also find that the presence of binding multiple reserve requirements help in reducing the scope for financial fragility and panic equilibria.

In this dissertation, I study international financial crises. For this purpose, I build two models. In the first model, I focus on financial crises in developing, large open economies where foreign debt with various maturities and issue dates is available. The objective is to measure the vulnerability of the domestic financial system to domestically triggered bank runs and externally triggered sudden stops. The main contribution of this model is that both types of crises are treated as rational responses of domestic depositors and international creditors. Such vulnerability measures are linked to fundamentals and equilibrium term structure of foreign debt. Banks’ vulnerability to runs increases if they hold a relatively shorter term debt. Also, a larger cost of liquidating the long-term investment before maturity makes the banks more fragile. In the next step, given a domestic banking crisis, I allow international creditors to decide whether they want to stop lending to domestic banks (in which case a “sudden stop” takes place) or not. A sudden stop is more likely if (i) creditors highly discount future consumption, (ii) creditors’ current income is small relative to their future income, and (iii) the cost of liquidating the long-term investment before maturity is small. In the second model, I investigate the merits of alternative monetary policies with respect to financial fragility. In this monetary model of an explicit financial system, I motivate the demand for two fiat currencies by spatial separation and limited communication of agents. There is a domestic and a foreign currency freely traded without restrictions. I analyze the policy of a constant growth rate of domestic money supply with a floating exchange rate regime. Both currencies are held in positive amounts at the steady-state only if the growth rate of domestic money supply is equal to the world inflation rate (WIR). If the former rate is larger than the WIR, domestic currency is not held at the steady-state. Also, total real money balances held is negatively related with WIR. Finally, monetary policy in the form of a constant growth rate of domestic money supply is neutral with respect to welfare.

This dissertation covers both policy-oriented and theory-based topics in International Economics. The first two chapters cover financial policy related to the capital account, while the third chapter covers tariff policy related to the current account. The first chapter examines the theoretical value of capital controls in reducing the probability of bank runs. I develop a global game model with information-based bank runs and strategic complementarities within and between foreign and domestic creditors. My analysis appears to be the first to model the interconnectedness of foreign and domestic creditor behavior. The framework pins down the probability of a bank run and shows that a capital control can lower the probability of a domestic bank run and of capital flight. I also find that a control on outflows is relatively more effective than a control on inflows. Finally, I test the model's implications using the abnormal returns of Brazilian and South Korean bank stock prices as a proxy for the probability of bank runs. The second chapter analyzes the policy actions of Brazil and Chile between 2009 and the third quarter of 2011, when Brazil deployed capital account regulations and Chile intervened in its currency markets. I examine the effectiveness of each of these actions and the extent to which the actions of Brazil caused capital flow spillovers in the Chilean market. Consistent with the peer-reviewed literature on the subject, I find that capital account regulations had small but significant effects on the shifting the composition of capital inflows toward longer-term investment, on the level and volatility of the exchange rate, on asset prices, and on the ability of Brazil to have independence in monetary policy. Brazil's regulations did also temporarily cause an increase in capital flows into Chile. Chile's interventions did not have a lasting impact on the Chilean exchange rate or on asset prices beyond the initial announcements of the policies. In Brazil's case we thus conclude that Brazil's regulations helped the nation 'lean against the wind,' but were not enough to tame the 'tsunami' of post-crisis capital flows. The third chapter uses a computable general equilibrium (CGE) model calibrated to late nineteenth century parameters to show that protectionism alleviated the skilled wage gap. Had the U.S. chosen free trade instead of protective tariffs, wage inequality generally would have been higher in the post-bellum era. The imposition of high tariffs after the Civil War may have dampened what some economic historians believe to have been a long-term upward trend in inequality--the rising portion of the American-Kuznets' curve.

The thesis focuses on the interaction between macroprudential and monetary policies in the presence of bank runs. In particular, it is examined whether the two policies should be conducted separately or jointly, and whether the occurence of a bank run affects the result. Furthermore, it is studied how a bank run impacts the efficiency of the two policies. \\ The baseline results suggest that cooperation between the two policies is less efficient than when they are determined separately. The reason might be a coordination issue that arises because the same objective is being assigned to both policies in the cooperative case. On the other hand, when facing a bank run the cooperative regime achieves a higher degree of financial stability by reducing the probability of a next run. This is caused by the fact that cooperating authorities choose more aggresive macroprudential policy when a bank run occurs. A bank run itself does not change the ranking of the two policy regimes. However, an occurence of a bank run induces higher efficiency of both policies, irrespective of the regime in place. In addition, the policies are more effective when they face financial shocks, as opposed to a productivity shock.

A bank run occurs when a large number of customers withdraw their deposits from a financial institution at the same time. This can destabilise the bank to the point where it runs out of cash and thus faces sudden bankruptcy. As more people withdraw their deposits, the likelihood of bankruptcy increases, thus triggering further withdrawals. In game theory this type of situation can be modelled as a “coordination game”, that is, a game with two pure equilibria: If sufficiently many people keep their money in the bank, then it will not default and it is rational for everyone to keep their money in the bank. On the other hand, if sufficiently many people withdraw their deposits the bank will default and it is then rational for everyone to try to withdraw their deposits. The overall objective of this study is to explain the phenomenon of bank runs by introducing the Diamond–Dybvig model. This model assumes that the function of a bank is to offer both long-term loans for investments and relatively short-term deposit service. Bank runs comes out as one of two equilibria when too many withdraw early before the long-term loans is paid back. Our task is to find out the condition that can lead to bank runs and more importantly, we will suggest two ways to address the problem of bank runs.

Thesis advisor: Susanto Basu / The goal of this dissertation is to shed some light on three separate aspects of the financial system that can lead to greater instability in the banking sector and greater macroeconomic volatility. The starting point of the Great Recession was the collapse of the banking sector in late 2007; in the subsequent months, liquidity evaporated in many markets for short term funding. The process of creating liquidity carried out by the banking system involves the transformation of long term illiquid assets into short term liquid liabilities. This engine functions properly as long as cash lenders continue to roll over short term funding to banks; whenever these lenders fear that banks will not be able to pay back these obligations, they immediately stop funding banks' short term liabilities. This makes banks unable to repay maturing short term debt, which leads to large spikes in default risk. This is often referred to as a modern bank run. Virtually all the theories of bank runs suggest that the severity of a run depends on how well lenders can coordinate their beliefs: whenever a lender expects many others to run, he becomes more likely to run as well. In a joint work with Emanuele Brancati, the first chapter of my dissertation, we empirically document the role of coordination in explaining bank runs and default risk. We establish two new results. First, when information is more precise and agents can better coordinate their actions, a change in market expectations has a larger impact on default risk; this implies that more precise information increases the vulnerability or instability of the banking system. This result has a clear policy implication: if policymakers want to stabilize the banking system they should promote opacity instead of transparency, especially during periods of financial turmoil. Second, we show that when a bank is expected to perform poorly, lower dispersion of beliefs actually increases default risk; this result is in contrast with standard theories in finance and can be rationalized by thinking about the impact that more precise information has on the ability of creditors to coordinate on a bank run. Another aspect of the banking system that is creating a lot of instability in Europe is the so called "disastrous banks-sovereign nexus": many banks in troubled countries owned a disproportionately large amount of domestic sovereign bonds; therefore, in case of a default of the sovereign country, the whole domestic banking sector would incur insurmountable losses. This behavior is puzzling because these banks in troubled countries would greatly benefit from having a more diversified asset portfolio, but instead decide to load up with domestic sovereign debt only. In a joint work with Filippo De Marco, the second chapter of my dissertation, we show that banks receive political pressures from their respective governments to load up on domestic sovereigns. First, we show that banks with a larger fraction of politicians as shareholders display greater home bias. More importantly, we exploit the fact that low-performing banks received liquidity injections by their domestic governments to show that, among those banks, only the "political banks" drastically increased their home bias upon receiving government help. Furthermore, it appears that the extent of political pressure on banks is much stronger on those "political banks" belonging to troubled countries. These findings suggest that troubled countries that would need to pay a high premium to issue new debt force their "political banks" to purchase part of the debt issuance. This greater risk-synchronization can create a dangerous loop of higher sovereign default risk leading to insolvency of the domestic banking system, which in turn would require a bail-out from the local government, further exacerbating the sovereign de- fault risk. Finally, the third chapter of my dissertation, a joint work with Susanto Basu, investigates the sources of excess consumption volatility in emerging markets. It is a well documented fact that, in emerging markets, consumption is more volatile than output whereas the opposite is true in developed economies. We propose an explanation for this phenomenon that relies on a specific form of financial markets incompleteness: we assume that households would always want to front-load consumption and they can borrow from abroad up to a fraction of the value of posted collateral. With the value of collateral being procyclical, households are able to increase borrowing during an expansion and ultimately consume more than they produce; this mechanism is then able to generate a ratio of consumption volatility to output volatility grater than one. Most importantly, the model delivers the implication that a better ability to borrow vis-a-vis the same value of collateral generates greater relative consumption volatility. We then bring this model's implication to the data and find empirical support for it. We proxy the ability to borrow with various measures of effectiveness of lending regulation and more standard indicators of financial development. Consistent with the model's implication, more lending friendly regulation leads to greater relative consumption volatility in emerging markets; moreover, this link breaks down among developed countries. In addition, among emerging countries, it appears that deeper domestic capital markets have a destabilizing effect in terms of greater relative consumption volatility while a more developed domestic banking system does not exerts any such detrimental effect. / Thesis (PhD) — Boston College, 2015. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

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