A Nobel for an economic model with real world application
Bernanke, Diamond and Dybvig have taught lessons about bank runs that have been absorbed since the financial crisis
SWEDEN’S Riksbank is sometimes accused, only half in jest, of awarding the Nobel memorial prize for economic research decades after the research in question actually made a difference. One could be forgiven for wishing the accusation were true today. The work that the 2022 prize honours – runs on financial institutions, the damage they do, and how to prevent them – remains depressingly timely.
The laureates – former United States Federal Reserve chair Ben Bernanke, and economics professors Douglas Diamond and Philip Dybvig – have demonstrated the fundamental role banks play in the economy, and above all, the role they play when things go wrong.
The Diamond-Dybvig model, a staple of economics teaching since it was developed in the 1980s, clarifies how banks intermediate between depositors who want immediate access to their savings and businesses that need long-term investment funding. The model sets out how and why banks are therefore vulnerable to deposit runs and establishes the central argument for government deposit insurance.
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