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Philip Dybvig, WashU Professor, receives Nobel Prize in Economic Sciences
Photo courtesy of The Source.
Philip Dybvig, Professor of Banking and Finance at the Olin School of Business, was awarded the 2022 Nobel Prize in Economic Sciences for his research on the vulnerability of banks during financial crises.
The Royal Swedish Academy of Sciences announced the recipients of the award on Monday, October 10th. Along with Dybvig, the recipients include two other economists, Ben S. Bernanke and University of Chicago professor Douglas W. Diamond.
The Nobel Prize Organization noted in their announcement that each of the laureates “have significantly improved our understanding of the role of banks in the economy” and that “their analyses have been of great practical importance in regulating financial markets.”
In 1983, Diamond and Dybvig wrote their seminal paper, titled “Bank Runs, Deposit Insurance, and Liquidity” in which they introduced their Diamond-Dybvig economic model. This paper by Diamond and Dybvig elaborated on the purpose of banks in an economy and how that makes them more vulnerable to certain crises.
Diamond and Dybvig’s paper explored what factors cause bank runs to occur, and the economic model that they pioneered explores how liquidity causes banks to become unstable. This mathematical model has since been cited tens of thousands of times and has been utilized to understand the proper course of action to take during a financial crisis.
Dybvig said he loves solving puzzles, which motivated him to conduct his research and write the subsequent paper.
“[I’m] curious about the banks, and the institutions, and the way people interact with them,” he said. While his co-author, Diamond, was aware of the possibility that their work might be applied in a more influential capacity, Dybvig said that he “didn’t get it when we wrote the paper that this could actually be really influential in practice.”
However, when he encounters colleagues or practitioners in the field of economics that know of and utilize his model, Dybvig noted that he finds that a particularly rewarding metric of his accomplishment. “I think that that’s really gratifying,” he said.
When asked about the impact of the Diamond-Dybvig model, Dybvig elaborated on the indirect ways that the model affects everyone. “If banks are regulated in a way that makes them safer, then that benefits a lot of people…and reduce[s] the probability or severity of bank crises,” Dybvig said.
Dybvig is now the 26th Nobel Laureate associated with Washington University in St. Louis to receive this distinction.