A macroeconomic model of liquidity crises
AbstractWe develop a simple macroeconomic model that captures key features of a liquidity crisis. During a crisis, the supply of short-term loans vanishes, the interest rate rises sharply, and the level of economic activity declines. A crisis may be caused either by self-fulfilling beliefs or by fundamental shocks. It occurs as a result of market failure due to debt overhang in short-term loans. The government's commitment to deposit guarantee reduces the likelihood of self-fulfilling crisis but increases that of fundamental crisis.
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Bibliographic InfoPaper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 876.
Date of creation: Aug 2013
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More information through EDIRC
Debt overhang; liquidity; working capital; systemic crisis.;
Find related papers by JEL classification:
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
- G01 - Financial Economics - - General - - - Financial Crises
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-08-10 (All new papers)
- NEP-BAN-2013-08-10 (Banking)
- NEP-CBA-2013-08-10 (Central Banking)
- NEP-DGE-2013-08-10 (Dynamic General Equilibrium)
- NEP-MAC-2013-08-10 (Macroeconomics)
- NEP-MON-2013-08-10 (Monetary Economics)
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