English, Article, Journal or magazine article edition: Banks, Liquidity Crises and Economic Growth Romain Rancière; Alejandro Gaytan; Romain Ranciere

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Bookmark: http://trove.nla.gov.au/version/154030
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Banks, Liquidity Crises and Economic Growth
Author
  • Romain Rancière
  • Alejandro Gaytan
  • Romain Ranciere
Physical Description
  • preprint
Notes
  • RePEc:upf:upfgen:853
  • 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 enhancing role in reducing inefficient liquidation of long term projects, but they may face liquidity crises associated with severe output losses. We show that middle income economies may find optimal to be exposed to liquidity crises, while poor and rich economies have more incentives to develop a fully covered banking system. Therefore, middle income economies could experience banking crises in the process of their development and, as they get richer, they eventually converge to a financially safe long run steady state. Finally, the model replicates the empirical fact of higher costs of banking crises for middle income economies
  • RePEc:ecm:nasm04:399
  • 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 can invest in a liquid storage technology or in a partially illiquid Cobb Douglas technology. By pooling liquidity risk, banks play a growth enhancing role in reducing inefficient liquidation of long term projects, but they may face liquidity crises associated with severe output losses. Middle income economies may find optimal to be exposed to liquidity crises, while poor and rich economies have more incentives to develop a fully covered banking system. Therefore, middle income economies could experience banking crises in the process of their development and, as they get richer, eventually converge to a financially safe long run steady state. The model also replicates the empirical fact of higher costs of banking crises for middle income economies. Finally, using GMM dynamic panel data techniques for a sample of 83 countries we show that growth implications of the model are consistent with the empirical facts.
  • OLG growth models, liquidity, financial intermediation, financial fragility, banking crises
  • RePEc:deg:conpap:c010_040
Language
  • English
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