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Coordination Frictions and The Financial Crisis

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  • Pieter A. Gautier

    (VU University Amsterdam)

Abstract

In this note I argue that the desirability of fiscal policy in response to the current crisis depends on whether one views the current crisis as a temporary deviation from a unique equilibrium or as a bad equilibrium out of multiple equilibria. The paper presents a simple Diamond (1982) type of model where firms must find an (investment) bank to finance their projects and the investment banks sell risky assets to get capital from investors. Due to coordination frictions, the economy can get stuck in an inefficient low-trade equilibrium. Finally, I briefly discuss some of the policies that have recently been put forward to stimulate the economy in the context of this model.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 09-028/3.

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Date of creation: 20 Mar 2009
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Handle: RePEc:dgr:uvatin:20090028

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Web page: http://www.tinbergen.nl

Related research

Keywords: financial crisis; coordination frictions; macroeconomic complementarities; search frictions;

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  1. Hartmann, P. & Straetmans, S. & De Vries, C.G., 2001. "Asset Market Linkages in Crisis Periods," Papers 71, Quebec a Montreal - Recherche en gestion.
  2. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(3), pages 401-19, June.
  3. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Is the 2007 US Sub-prime Financial Crisis So Different? An International Historical Comparison," American Economic Review, American Economic Association, vol. 98(2), pages 339-44, May.
  4. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1994. "The Financial Accelerator and the Flight to Quality," Working Papers, C.V. Starr Center for Applied Economics, New York University 94-24, C.V. Starr Center for Applied Economics, New York University.
  5. Anil K Kashyap & Jeremy C. Stein & David W. Wilcox, 1992. "Monetary Policy and Credit Conditions: Evidence From the Composition of External Finance," NBER Working Papers 4015, National Bureau of Economic Research, Inc.
  6. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(5), pages 881-94, October.
  7. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," NBER Working Papers 14656, National Bureau of Economic Research, Inc.
  8. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 103(3), pages 441-63, August.
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