Banking Crisis and Borrower Productivity
In this paper, we propose a theoretical model in which a banking crisis (or bank distress) causes declines in aggregate productivity. When borrowing firms need additional bank loans to continue their businesses, a high probability of bank failure discourages ex ante investments (e.g., R&D investment) by firms that enhance their productivity. In a general equilibrium setting, we also show that there may be multiple equilibria: one in which bank distress continues and borrower productivity is low, and in the other, banks are healthy and borrower productivity is high. We show that the bank capital requirement may be effective in eliminating the bad equilibrium and may lead the economy to the good equilibrium in which the productivity of borrowing firms and the aggregate output are both high and the probability of bank failure is low.
|Date of creation:||Feb 2008|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.rieti.go.jp/
More information through EDIRC
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.:
- Douglas W. Diamond & Raghuram G. Rajan, .
"A Theory of Bank Capital,"
CRSP working papers
363, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- 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.
- Levine, Ross, 1996.
"Financial development and economic growth : views and agenda,"
Policy Research Working Paper Series
1678, The World Bank.
- Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
- Holmstrom, B & Tirole, J, 1996.
"Private and Public Supply of Liquidity,"
96-21, Massachusetts Institute of Technology (MIT), Department of Economics.
- Ross Levine & Sara Zervos, .
"Stock markets, banks and economic growth ,"
CERF Discussion Paper Series
95-11, Economics and Finance Section, School of Social Sciences, Brunel University.
- Harold L. Cole & Lee E. Ohanian & Ron Leung, 2005.
"Deflation and the International Great Depression: A Productivity Puzzle,"
NBER Working Papers
11237, National Bureau of Economic Research, Inc.
- Harold L. Cole & Lee E. Ohanian & Ron Leung, 2005. "Deflation and the international Great Depression: a productivity puzzle," Staff Report 356, Federal Reserve Bank of Minneapolis.
- Douglas W. Diamond & Raghuram G. Rajan, 2005.
"Liquidity Shortages and Banking Crises,"
Journal of Finance,
American Finance Association, vol. 60(2), pages 615-647, 04.
- Douglas W. Diamond & Raghuram G. Rajan, 2002. "Liquidity Shortages and Banking Crises," NBER Working Papers 8937, National Bureau of Economic Research, Inc.
- Douglas W. Diamond & Raghuram G. Rajan, 2003. "Liquidity Shortages and Banking Crises," NBER Working Papers 10071, National Bureau of Economic Research, Inc.
- Franklin Allen & Douglas Gale, 1998. "Financial Contagion Journal of Political Economy," Center for Financial Institutions Working Papers 98-31, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Lucy White & Alan D. Morrison, 2002.
"Crises and Capital Requirements in Banking,"
OFRC Working Papers Series
2002fe05, Oxford Financial Research Centre.
- Harold L. Cole & Lee E. Ohanian, 1999. "The Great Depression in the United States from a neoclassical perspective," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-24.
When requesting a correction, please mention this item's handle: RePEc:eti:dpaper:08003. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (NUKATANI Sorahiko)
If references are entirely missing, you can add them using this form.