Economic Growth, Liquidity, and Bank Runs

27 Pages Posted: 3 Dec 2012 Last revised: 15 Feb 2013

See all articles by Huberto M. Ennis

Huberto M. Ennis

Federal Reserve Banks - Federal Reserve Bank of Richmond

Todd Keister

Rutgers, The State University of New Jersey - Department of Economics

Date Written: January 1, 2003

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.

Keywords: banking panics, endogenous growth, equilibrium selection

JEL Classification: E42, G21, O42

Suggested Citation

Ennis, Huberto M. and Keister, Todd, Economic Growth, Liquidity, and Bank Runs (January 1, 2003). Federal Reserve Bank of Richmond Working Paper No. 03-1. Available at SSRN: https://ssrn.com/abstract=2184541 or http://dx.doi.org/10.2139/ssrn.2184541

Huberto M. Ennis (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Todd Keister

Rutgers, The State University of New Jersey - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

HOME PAGE: http://econweb.rutgers.edu/tkeister

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