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Banks, Liquidity Crises and Economic Growth

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Author Info
Alejandro Gaytán González
Romain Ranciere

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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/documents/%7B6F50ABC9-BE6D-C3AA-69B3-451662E59F21%7D.pdf
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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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Related research
Keywords: Growth models; Liquidity; Financial intermediation; Financial fragility; Banking crises;

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Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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    Other versions:
  2. Alejandro Gaytan & Romain Rancière, 2004. "Wealth, Financial Intermediation and Growth," Economics Working Papers 851, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2004. [Downloadable!]
    Other versions:
  3. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  4. George-Marios Angeletos & Laurent E. Calvet, 2001. "Incomplete Markets, Growth, and the Business Cycle," Harvard Institute of Economic Research Working Papers 1910, Harvard - Institute of Economic Research. [Downloadable!]
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  6. Ilan Goldfajn & Rodrigo O. Valdés, 1997. "Capital Flows and the Twin Crises : The Role of Liquidity," IMF Working Papers 97/87, International Monetary Fund.
  7. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October. [Downloadable!] (restricted)
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  11. Franklin Allen & Douglas Gale, 1976. "Optimal Financial Crises," Center for Financial Institutions Working Papers 97-01, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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  12. Fulghieri, Paolo & Rovelli, Riccardo, 1998. "Capital markets, financial intermediaries, and liquidity supply," Journal of Banking & Finance, Elsevier, vol. 22(9), pages 1157-1180, September. [Downloadable!] (restricted)
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  14. Daron Acemoglu & Fabrizio Zilibotti, 1994. "Was Prometheus Unbound by Chance? Risk, Diversification and Growth," Economics Working Papers 98, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  15. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June. [Downloadable!] (restricted)
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  18. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Blackwell Publishing, vol. 58(2), pages 195-209, April. [Downloadable!] (restricted)
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  19. repec:pal:imfstp:v:45:y:1998:i:1:p:3 is not listed on IDEAS
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  21. Benhabib, Jess & Spiegel, Mark M, 2000. " The Role of Financial Development in Growth and Investment," Journal of Economic Growth, Springer, vol. 5(4), pages 341-60, December. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Huberto M. Ennis & Todd Keister, 2004. "Bank runs and investment decisions revisited," Working Paper 04-03, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  2. Romain Ranciere & Norman Loayza, 2005. "Financial Development, Financial Fragility, and Growth," IMF Working Papers 05/170, International Monetary Fund. [Downloadable!]
    Other versions:
  3. Romain Ranciere & Aaron Tornell & Frank Westermann, 2004. "Crises and Growth: A Re-evaluation," UCLA Economics Working Papers 832, UCLA Department of Economics. [Downloadable!]
    Other versions:
  4. Hnatkovska, Viktoria & Loayza, Norman, 2004. "Volatility and growth," Policy Research Working Paper Series 3184, The World Bank. [Downloadable!]
  5. Alejandro Gaytan & Romain Rancière, 2004. "Wealth, Financial Intermediation and Growth," Economics Working Papers 851, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2004. [Downloadable!]
    Other versions:
  6. Aaron Tornell, 2003. "Crises and Growth: A Re-evaluation (September 2003)," UCLA Economics Online Papers 264, UCLA Department of Economics. [Downloadable!]
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This page was last updated on 2009-11-26.

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