Uncertainty in an Interconnected Financial System, Contagion
AbstractThis paper studies contagion and market freezes caused by uncertainty in financial network structures and provides theoretical guidance for central banks. We establish a formal model to demonstrate that, in a financial system where financial institutions are interconnected, a negative shock to an individual financial institution could spread to other institutions, causing market freezes because of creditors' uncertainty about the financial network structure. Central bank policies to alleviate market freezes and contagion, such as information policy, bailout policy and the lender of last resort policy, are examined.
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Bibliographic InfoPaper provided by University of Guelph, Department of Economics in its series Working Papers with number 1304.
Length: 51 pages
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Interconnection; Market Freezes; Contagion; Financial Crises;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G2 - Financial Economics - - Financial Institutions and Services
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