(2) The liquidity problems affecting money markets in 2007-08 have been described as “a run on repo”. Describe in detail how a bank run arises. Explain the liquidity problems that affected the money markets in 2007-08, drawing analogies between these and a traditional bank run. Throughout your essay take care to explain the nature of the financial instruments and markets you discuss.
Readings:
Diamond, Douglas W. (2007), “Banks and Liquidity Creation: A Simple Exposition of the Diamond-Dybvig Model,” Federal Reserve Bank of Richmond Economic Quarterly, 93(2), pp. 189-200.
Gorton, G., and A. Metrick (2012), “Getting Up to Speed on the Financial Crisis: A One-Weekend-Reader’s Guide,” Journal of Economic Literature, 50(1), pp. 128-150.
Gorton, G., and A. Metrick (2012), “Securitized Banking and the Run on Repo,” Journal of Financial Economics, 104(3), pp. 421-560.
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