Abstract for: Money Multiplier Dynamics and Banking Liquidity Cycles
Banking crises are commonly assumed to be driven by external events such as speculative bubbles, imposed on a normally stable banking system. To the contrary, this paper presents evidence that liquidity cycles and crises can arise naturally from the most basic structure of the banking system itself. The stability of a banking system can depend not only on the reserve requirements, but also on the relative magnitudes of other fundamental parameters, such as the lifetime of loans, the lifetime of deposits, and the time banks take to convert available liquidity into loans. Under realistic parameter values, a banking- regulatory system itself may generate spontaneous oscillations of sufficient amplitude to cause crises.