Permalink : http://hdl.handle.net/2115/5380

KEYWORDS : Liquidity Costs, Endogenous Growth, Financial Intermediaries

In this paper, we examine the relation between the portfolio decisions that financial intermediaries make to avoid bank runs and the liquidation costs of capital investment. This relation also influences economic growth. This paper shows that if financial intermediaries avoid runs, there exist three regions of liquidation costs. Changes in liquidity costs in each region have different effects on economic growth in a simple endogenous growth model. We also examine portfolio decisions in an economy without financial intermediaries. This reveals the significance of financial sector for economic growth. (JEL G11, E13, D82, E44)