Nobel Prize for Ben Bernanke, Douglas Diamond, and Philip Dybvig

The 2022 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (aka Nobel Prize in Economics) was announced yesterday, with the awardees being Ben Bernanke (Brookings Institution), Douglas Diamond (University of Chicago) and Philip Dybvig (Washington University in St Louis), "for research on banks and financial crises". As usual, the award has been well covered in the media, including social media. Bernanke is the best known of the three, particularly as he was the chair of the Federal Reserve Bank at the time of the Global Financial Crisis, and responsible for the Fed's adoption of 'quantitative easing'.

Aside from Bernanke's leadership in the GFC, the three are best known for helping us to understand the role of banks in the economy. In particular, Bernanke wrote some seminal research on understanding how the unavailability of credit turned a bad recession into the Great Depression. Among other contributions, Diamond and Dybvig gave theoretical backing for the role of commercial banks in the creation of money. Their contributions are explained in more detail and very clearly in this article in The Conversation by Elena Carletti (Bocconi University):

The works by Diamond and Dybvig essentially explained why banks exist and the role they play in the economy by channelling savings from individuals into productive investments. Essentially, banks play two roles. On the one hand, they monitor borrowers within the economy. On the other, they provide liquidity to individuals, who don’t know what they will need to buy in future, and this can make them averse to depositing money in case it’s not available when they need it. Banks smooth out this aversion by providing us with the assurance that we will be able to take out our money when it’s required.

The problem is that by providing this assurance, banks are also vulnerable to crises even at times when their finances are healthy. This occurs when individual depositors worry that many other depositors are removing their money from the bank. This then gives them an incentive to remove money themselves, which can lead to a panic that causes a bank run.

Ben Bernanke fed into this by looking at bank behaviour during the great depression of the 1930s, and showed that bank runs during the depression was the decisive factor in making the crisis longer and deeper than it otherwise would have been.

Tyler Cowen at Marginal Revolution has great summaries of their contributions here (for Bernanke) and here (for Diamond and Dybvig). You can read the Nobel Committee's summary of their work here. This was a well-deserved award, and macroeconomics was due, with the last awards for macroeconomics back in 2018.