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Booms and systemic banking crises

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  • Boissay, Frederic
  • Collard, Fabrice
  • Smets, Frank

Abstract

The empirical literature on systemic banking crises (SBCs) has shown that SBCs are rare events that break out in the midst of credit intensive booms and bring about particularly deep and long-lasting recessions. We attempt to explain these phenomena within a dynamic general equilibrium model featuring a non-trivial banking sector. In the model, banks are heterogeneous with respect to their intermediation skills, which gives rise to an interbank market. Moral hazard and asymmetric information on this market may generate sudden interbank market freezes, SBCs, credit crunches and, ultimately, severe recessions. Simulations of a calibrated version of the model indicate that typical SBCs break out in the midst of a credit boom generated by a sequence of positive supply shocks rather than being the outcome of a big negative wealth shock. We also show that the model can account for the relative severity of recessions with SBCs and their longer duration. JEL Classification: E32, E44, G01, G21

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1514.

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Date of creation: Feb 2013
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Handle: RePEc:ecb:ecbwps:20131514

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Keywords: Asymmetric information; credit crunch; lending boom; Moral Hazard; systemic banking crisis;

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Cited by:
  1. Jaromir Benes & Michael Kumhof & Douglas Laxton, 2014. "Financial Crises in DSGE Models: Selected Applications of MAPMOD," IMF Working Papers 14/56, International Monetary Fund.

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