Economic growth, liquidity, and bank runs

Abstract

We examine the growth implications of bank runs. To do so, we construct an endogenous growth model in which bank runs occur with positive probability in equilibrium. In this setting, a bank run has a permanent effect on the capital stock and on the level of output. In addition, the possibility of a bank run changes the portfolio choice of banks and thereby affects the long-run growth rate. We consider two different equilibrium selection rules. In the first, a run is triggered by sunspots and occurs with a fixed probability. A higher probability of a run in this case leads banks to hold a more liquid portfolio, which decreases total investment and thereby reduces capital formation. Hence the economy grows slower, even when a run does not occur. Under the second selection rule, the probability of a run is influenced by the bank's portfolio choice. This leads banks to place more resources in long-term investment, and the economy both grows faster and experiences fewer runs.

From Institutions to Financial Development and Growth: What are the Links?

“…As shown by Ennis and Keister (2003) within this same framework, banks do not completely eliminate the need to hold liquid assets because of the possibility of bank runs. However, allocating more resources to investment through banks has the direct e¤ect of increasing capital accumulation and growth, and the indirect e¤ect of decreasing the "bank-run payo¤", thereby reducing the probability of runs, the need for precautionary savings and the long-run average rate of growth.…”

Wealth, Financial Intermediation and Growth

“…Bencivenga and Smith (1991), Ennis and Keister (2003), Qi (1994) and Fulghieri and Rovelli (1998) have studied the DD model in overlapping generations frameworks. Qi (1994) closer to our paper, they investigate the relationship between financial intermediation and growth.…”

“…22 A risk neutral consumer will invest in a risky asset up to the point where the actuarial marginal return of the risky asset equates the marginal return of the safe asset; a risk averse consumer will invest always strictly less than this level and lim w→∞ k opt (w) = k max At t = 1 an initial old generation exists, endowed with w 0 > 0, and we assume that this wealth has already been invested according with the optimal conditions stated in proposition 4.1 . The timing convention is that a generation born at t makes its optimal choice of capital k t+1 , therefore:…”

“…Agents still have access to the storage technology, therefore, the bank must offer a higher return to patient consumers so that they do not withdraw their funds at the early stage and store it up to the late stage. This is reflected in the incentive compatibility constraint (22).…”

Kognitív képességek és stratégiai bizonytalanság egy bankrohamkísérletben

“…e szavak a koordinációs magyarázatot támasztják alá. számos tanulmány mutatja be, hogy akkor is voltak bankpánikok, amikor a gazdasági helyzet nem volt rossz (Ennis [2003]), illetve jó fundamentumokkal rendelkező bankokat is megrohantak (Davison-Ramirez [2014], De Graeve-Karas [2014]). …”