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Financial Innovation, Macroeconomic Stability and Systemic Crisis

Gai, Prasanna; Kapadia, Sujit; Millard, Stephen; Perez, Ander


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...[Show more]

CollectionsANU Research Publications
Date published: 2008
Type: Journal article
Source: The Economic Journal
DOI: 10.1111/j.1468-0297.2007.02127.x


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