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A DSGE model of banks and financial intermediation with default risk

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  • Wickens, Michael R.

Abstract

This paper takes the view that a major contributing factor to the financial crisis of 2008 was a failure to correctly assess and price the risk of default. In order to analyse default risk in the macroeconomy, a simple general equilibrium model with banks and financial intermediation is constructed in which default-risk can be priced. It is shown how the credit spread can be attributed largely to the risk of default and how excess loan creation may emerge due different attitudes to risk by borrowers and lenders. The model can also be used to analyse systemic risk due to macroeconomic shocks which may be reduced by holding collateral.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8556.

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Date of creation: Sep 2011
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Handle: RePEc:cpr:ceprdp:8556

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Related research

Keywords: Default; Financial crisis; Financial intermediation; Liquidity shortages; Risk;

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  1. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
  2. Vasco Curdia & Michael Woodford, 2010. "The Central Bank Balance Sheet as an Instrument of Monetary Policy," Discussion Papers 0910-16, Columbia University, Department of Economics.
  3. John B. Taylor & John C. Williams, 2008. "A Black Swan in the Money Market," NBER Working Papers 13943, National Bureau of Economic Research, Inc.
  4. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  5. M. H. Khalil Timamy, 2005. "Debate," Review of African Political Economy, Taylor & Francis Journals, vol. 32(104-105), pages 383-393, June.
  6. Vasco Curdia & Michael Woodford, 2008. "Credit Frictions and Optimal Monetary Policy," Discussion Papers 0809-02, Columbia University, Department of Economics.
  7. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Diamond, Peter A, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 217-27, April.
  9. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  10. Williamson, Stephen D, 1987. "Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing," The Quarterly Journal of Economics, MIT Press, vol. 102(1), pages 135-45, February.
  11. Dellas, Harris, 2011. "Comment on: "The central-bank balance sheet as an instrument of monetary policy"," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 80-82, January.
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