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Banks, Liquidity Crises and Economic Growth

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  • Alejandro Gaytán González
  • Romain Ranciere

Abstract

How do the liquidity functions of banks affect investment and growth at different stages of economic development? How do financial fragility and the costs of banking crises evolve with the level of wealth of countries? We analyze these issues using an overlapping generations growth model where agents, who experience idiosyncratic liquidity shocks, can invest in a liquid storage technology or in a partially illiquid Cobb-Douglas technology. By pooling liquidity risk, banks play a growth-ancing role in reducing ineffcient liquidation of long-term projects, but they may face liquidity crises associated with severe output losses. We show that middle-income economies may find it optimal to be exposed to liquidity crises, while poor and rich economies have more incentives to develop a fully covered banking system.

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File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7B6F50ABC9-BE6D-C3AA-69B3-451662E59F21%7D.pdf
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Bibliographic Info

Paper provided by Banco de México in its series Working Papers with number 2005-03.

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Date of creation: Jun 2005
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Handle: RePEc:bdm:wpaper:2005-03

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Web page: http://www.banxico.org.mx
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Keywords: Growth models; Liquidity; Financial intermediation; Financial fragility; Banking crises;

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Citations

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Cited by:
  1. Todd Keister & Huberto M. Ennis, 2004. "Bank Runs and Investment Decisions Revisited," 2004 Meeting Papers 180, Society for Economic Dynamics.
  2. Loayza, Norman V. & Ranciere, Romain, 2006. "Financial Development, Financial Fragility, and Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 1051-1076, June.
  3. Miller, Victoria, 2008. "Bank runs, foreign exchange reserves and credibility: When size does not matter," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(5), pages 557-565, December.
  4. Fran Westermann & Romain Ranciere & Aaron Tornell, 2004. "Crises and Growth: A Re-evaluation," 2004 Meeting Papers 130, Society for Economic Dynamics.
  5. Wu, Jyh-Lin & Hou, Han & Cheng, Su-Yin, 2010. "The dynamic impacts of financial institutions on economic growth: Evidence from the European Union," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 879-891, September.
  6. Alejandro Gaytan & Romain Ranciere, 2004. "Wealth, Financial Intermediation and Growth," Working Papers 191, Barcelona Graduate School of Economics.
  7. Edoardo Gaffeo & Petya Garalova, 2014. "On the finance-growth nexus: additional evidence from Central and Eastern Europe countries," Economic Change and Restructuring, Springer, vol. 47(2), pages 89-115, May.
  8. Aaron Tornell, 2003. "Crises and Growth: A Re-evaluation (September 2003)," UCLA Economics Online Papers 264, UCLA Department of Economics.
  9. Su-Yin Cheng & Chia-Cheng Ho & Han Hou, 2014. "The Finance-growth Relationship and the Level of Country Development," Journal of Financial Services Research, Springer, vol. 45(1), pages 117-140, February.
  10. Hnatkovska, Viktoria & Loayza, Norman, 2004. "Volatility and growth," Policy Research Working Paper Series 3184, The World Bank.

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