Financial crises and the evaporation of trust
AbstractTrust lies at the crux of most economic transactions, with credit markets being a notable example. Drawing on insights from the literature on coordination games and network growth, we develop a simple model to clarify how trust breaks down in financial systems. We show how the arrival of bad news about a financial agent can lead others to lose confidence in it and how this, in turn, can spread across the entire system. Our results emphasize the role of hysteresis -- it takes considerable effort to regain trust once it has been broken. Although simple, the model provides a plausible account of the credit freeze that followed the global financial crisis of 2007/8, both in terms of the sequence of events and the measures taken (and being proposed) by the authorities.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 0911.3099.
Date of creation: Nov 2009
Date of revision:
Contact details of provider:
Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-11-21 (All new papers)
- NEP-FDG-2009-11-21 (Financial Development & Growth)
- NEP-SOC-2009-11-21 (Social Norms & Social Capital)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Christian Upper, 2007. "Using counterfactual simulations to assess the danger of contagion in interbank markets," BIS Working Papers 234, Bank for International Settlements.
- Ricardo J. Caballero & Alp Simsek, 2009. "Complexity and Financial Panics," NBER Working Papers 14997, National Bureau of Economic Research, Inc.
- Scheinkman, Jose A. & Soutter, Christine L. & Glaeser, Edward Ludwig & Laibson, David I., 2000.
4481497, Harvard University Department of Economics.
- Viral V. Acharya & Douglas Gale & Tanju Yorulmazer, 2010.
"Rollover Risk and Market Freezes,"
NBER Working Papers
15674, National Bureau of Economic Research, Inc.
- Czerniak, Adam, 2010.
"Symptomy kryzysu globalnego a etyka gospodarcza religii światowych. Analiza porównawcza bankowości islamskiej i bankowości klasycznej w kontekście kryzysu finansowego
[The differences between ," MPRA Paper 26971, University Library of Munich, Germany.
- Jean-Philippe Bouchaud, 2011. "Panel Statement: The endogenous dynamics of markets: price impact and feedback loops," Chapters, European Central Bank.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators).
If references are entirely missing, you can add them using this form.