Financial Innovation, Macroeconomic Stability and Systemic Crises
We present a general equilibrium model of intermediation designed to capture some of the key features of the modern financial system. The model incorporates financial constraints and state-contingent contracts, and contains a clearly defined pecuniary externality associated with asset fire sales during periods of stress. If a sufficiently severe shock occurs during a credit expansion, this externality is capable of generating a systemic financial crisis that may be self-fulfilling. Our model suggests that financial innovation and greater macroeconomic stability may have made financial crises in developed countries less likely than in the past but potentially more severe. Copyright © Bank of England.
Year of publication: |
2008
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Authors: | Gai, Prasanna ; Kapadia, Sujit ; Millard, Stephen ; Perez, Ander |
Published in: |
Economic Journal. - Royal Economic Society - RES, ISSN 1468-0297. - Vol. 118.2008, 527, p. 401-426
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Publisher: |
Royal Economic Society - RES |
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