Economic Fundamentals and Bank Runs

R ecently there has been a renewed discussion in the literature about the determinants of bank runs. Two alternative theoretical explanations are usually provided. According to the first theory, bank runs are exclusively driven by changes in economic fundamentals, such as a deterioration in the return on investment. The second theory views bank runs as a consequence of the existence of multiple equilibria. In the latter case, which equilibrium obtains depends on the realization of an extrinsic random variable, often called “sunspots.” Extrinsic uncertainty is uncertainty in economic outcomes that does not originate directly in changes of economic fundamentals (see Shell and Smith [1992]). The word “sunspots” is intended to convey the idea that these random variables do not directly influence the economic fundamentals of the economy.1 However, sunspots can still influence economic outcomes to the extent that people believe they do. In this sense, sunspots can be viewed as coordination devices for agents’ expectations in decentralized market economies. This is the view adopted in the bank-run literature and in this paper. Some scholars have recently argued that the multiple-equilibria-plussunspots explanation of bank runs is inconsistent with available evidence