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Financial Innovation, Macroeconomic Stability and Systemic Crisis

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

Description

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]

dc.contributor.authorGai, Prasanna
dc.contributor.authorKapadia, Sujit
dc.contributor.authorMillard, Stephen
dc.contributor.authorPerez, Ander
dc.date.accessioned2015-12-10T22:12:07Z
dc.identifier.issn0013-0133
dc.identifier.urihttp://hdl.handle.net/1885/49494
dc.description.abstractWe 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.
dc.publisherBlackwell Publishing Ltd
dc.sourceThe Economic Journal
dc.subjectKeywords: conference proceeding; credit provision; crisis management; financial system; general equilibrium analysis; macroeconomics; modeling
dc.titleFinancial Innovation, Macroeconomic Stability and Systemic Crisis
dc.typeJournal article
local.description.notesImported from ARIES
local.identifier.citationvolume118
dc.date.issued2008
local.identifier.absfor140212 - Macroeconomics (incl. Monetary and Fiscal Theory)
local.identifier.ariespublicationu4055784xPUB187
local.type.statusPublished Version
local.contributor.affiliationGai, Prasanna, College of Asia and the Pacific, ANU
local.contributor.affiliationKapadia, Sujit, Bank of England
local.contributor.affiliationMillard, Stephen, Bank of England
local.contributor.affiliationPerez, Ander, London School of Economics
local.description.embargo2037-12-31
local.bibliographicCitation.issue527
local.bibliographicCitation.startpage401
local.bibliographicCitation.lastpage426
local.identifier.doi10.1111/j.1468-0297.2007.02127.x
dc.date.updated2015-12-09T07:49:39Z
local.identifier.scopusID2-s2.0-39649090038
CollectionsANU Research Publications

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