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
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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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