Banks, Liquidity Crises and Economic Growth

Romain Ranciere and Gaytán González Alejandro

No 2005-03, Working Papers from Banco de México

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 experience idiosyncratic liquidity shocks. 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 it 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.

JEL-codes: E44 G21 O11 (search for similar items in EconPapers)
Date: 2005-06
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Banks, Liquidity Crises and Economic Growth (2005)
Working Paper: Banks, Liquidity Crises and Economic Growth (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:bdm:wpaper:2005-03

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