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Systemic risk and financial development in a monetary model

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  • Moutot, Philippe
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    Abstract

    In a stochastic pure endowment economy with money but no financial markets, two types of agents trade one non-durable good using two alternative types of cash constraints. Simulations of the corresponding variants are compared to Arrow-Debreu and Autarky equilibriums. First, this illustrates how financial innovation or financial regression, including systemic risk, may arise in a neo-classical model with rational expectations and may or may not be countered. Second, the price and money partition dynamics that the two variants generate absent any macroeconomic shock, exhibit jumps as well as fat-tails and vary depending on the discount rate. JEL Classification: E44

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    Bibliographic Info

    Paper provided by European Central Bank in its series Working Paper Series with number 1352.

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    Date of creation: Jun 2011
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    Handle: RePEc:ecb:ecbwps:20111352

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    Related research

    Keywords: Cash constraints; Financial Development; heterogeneity; monetary model; Rational Expectations; systemic risk;

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    1. Laidler, David, 2010. "Lucas, Keynes, And The Crisis," Journal of the History of Economic Thought, Cambridge University Press, vol. 32(01), pages 39-62, March.
    2. Matthieu Wyart & Jean-Philippe Bouchaud & Julien Kockelkoren & Marc Potters & Michele Vettorazzo, 2006. "Relation between Bid-Ask Spread, Impact and Volatility in Double Auction Markets," Papers physics/0603084, arXiv.org, revised Mar 2007.
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