Economic growth, liquidity, and bank runs

Huberto M. Ennis, Donald Keister

Research output: Contribution to journalArticle

31 Citations (Scopus)

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

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Bank runs
Economic growth
Liquidity
Portfolio choice
Equilibrium selection
Capital stock
Endogenous growth model
Sunspots
Long-run growth

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Cite this

Ennis, Huberto M. ; Keister, Donald. / Economic growth, liquidity, and bank runs. In: Journal of Economic Theory. 2003 ; Vol. 109, No. 2. pp. 220-245.
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Economic growth, liquidity, and bank runs. / Ennis, Huberto M.; Keister, Donald.

In: Journal of Economic Theory, Vol. 109, No. 2, 01.04.2003, p. 220-245.

Research output: Contribution to journalArticle

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