University of Washington economics professor receives Nobel Prize for insights into financial crises

University of Washington professor Philip Dybvig was among three economists to receive a Nobel Prize on Monday, October 10, 2022.

ST. LOUIS — Three economists were awarded a Nobel Prize on Monday for their research on financial crises, including a University of Washington professor whose work on bank runs has become seminal in the field of economics.

The winners were awarded for articles published in the early 1980s that helped shape the way economists view banks and their role in times of financial calamity.

University of Washington professor Philip Dybvig and University of Chicago finance professor Douglas Diamond received the Nobel Prize in Economics for a paper they co-authored on bank runs, when depositors think a bank is about to fail and rush in droves to withdraw cash.

They received the award alongside Ben Bernanke, who chaired the Federal Reserve during the Great Recession. Bernanke was awarded for a 1983 article on the role of banks in the Great Depression.

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Dybvig and Diamond’s cast paper bank is not just a symptom of economic damage, but a contributor. The work looks at the instability they create and the role of protections like deposit insurance.

“People, before that time, largely viewed bank runs as fads or psychological phenomena,” Dybvig said in an interview Monday. But bank runs are based on rational fears, he said, and with proper measures in place they can be avoided.

The “Diamond-Dybvig model” has become one of the basic frameworks taught to economics students about financial institutions, said University of Washington economics professor Gaetano Antinolfi. The ideas in the paper went on to generate “colossal literature”, he said.

Dybvig, 67, grew up in Kettering, Ohio, outside of Dayton. He earned a bachelor’s degree from Indiana University, where he double majored in math and physics. He said he chose the school in part because of its music program – Dybvig is a classically trained pianist and still enjoys playing blues and jazz on the keyboard. He then obtained a master’s degree and a doctorate. from Yale University.

The Journal of Political Economy published the Nobel Prize-winning paper in 1983, when Dybvig was in his late twenties.

Dybvig joined Washington University’s Olin Business School in 1988. He said Robert Virgil Jr., then dean of the business school, was instrumental in bringing him to St. Louis.

Over the years, people have suggested that the oft-cited paper on bank runs could win a Nobel Prize, Dybvig said. But winning the award with Bernanke, who “took what academics were doing and used it to help lead the country through really tough times,” was a welcome surprise, he said.

Bernanke’s article showed that the banking crisis both contributed to the Great Depression and prolonged the recession.

“People didn’t think the financial system was an important part of the business cycle, an important part of what drove the economy,” Bernanke said Monday at the Brookings Institution, a nonprofit public policy organization in Washington. . “As a professor told me when I presented this paper, ‘The financial system is just a veil. It just tells you who owns what.

The Nobel Prize was awarded to 26 people from the University of Washington, most in the fields of physiology and medicine. Dybvig is the second to receive the economy award. The late Douglass North, a professor at the University of Washington, received the Nobel Prize in Economics in 1993 alongside Robert Fogel, an economist at the University of Chicago.