Economic growth, liquidity, and bank runs

Huberto M. Ennis, Todd Keister

Research output: Contribution to journalArticle

33 Scopus citations

Abstract

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 levels of the capital stock and of output. In addition, the possibility of a run changes the portfolio choices of depositors and of banks, and thereby affects the long-run growth rate. These facts imply that both the occurrence of a run and the mere possibility of runs in a given period have a large impact on all future periods. A bank run in our model is triggered by sunspots, and we consider two different equilibrium selection rules. In the first, a run occurs with a fixed, exogenous probability, while in the second the probability of a run is influenced by banks' portfolio choices. We show that when the choices of an individual bank affect the probability of a run on that bank, the economy both grows faster and experiences fewer runs.

Original languageEnglish (US)
Pages (from-to)220-245
Number of pages26
JournalJournal of Economic Theory
Volume109
Issue number2
DOIs
StatePublished - Apr 1 2003
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Banking panics
  • Capital formation
  • Deposit contracts
  • Endogenous growth
  • Equilibrium
  • Equilibrium selection
  • Sunspot

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