The Financial and Macroeconomic Implications of Banking Frictions and Banking Riskiness
AbstractThis paper develops a model of banking frictions and banking riskiness, the importance of which is highlighted by the recent Global Financial Crisis (GFC). We propose a model-based approach to decompose the effect of a banking riskiness shock into a pure default effect and a risk effect when risk sharing among the depositors is imperfect. Although the default effect is quantitatively more important, the risk effect is not to be neglected. When the shock generates a bank spread similar in value to the peak during the GFC, the overall effect is a decline in employment by 6:57 percent. The pure default effect leads to a 4:76 percent employment decline by a “within-model” measure, and a 5:05 decline by a “between-model” measure. The remaining is attributed to the risk effect.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 14-11.
Length: 40 pages
Date of creation: Jun 2011
Date of revision:
Contact details of provider:
Postal: Department of Economics, Monash University, Victoria 3800, Australia
Web page: http://www.buseco.monash.edu.au/eco/
More information through EDIRC
Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-07-13 (All new papers)
- NEP-BAN-2011-07-13 (Banking)
- NEP-CBA-2011-07-13 (Central Banking)
- NEP-MAC-2011-07-13 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
- Zhixiong Zeng, 2004.
"The Price Of Size And Financial Market Allocations,"
Royal Economic Society Annual Conference 2004, Royal Economic Society
86, Royal Economic Society.
- Zhixiong Zeng, 2007. "The price of size and financial market allocations," Economic Theory, Springer, Springer, vol. 30(1), pages 21-48, January.
- V. Cerasi & S. Daltung, 1995.
"The Optimal Size of a Bank: Costs and Benefits of Diversification,"
Departmental Working Papers, Department of Economics, Management and Quantitative Methods at UniversitÃ degli Studi di Milano
1995-05, Department of Economics, Management and Quantitative Methods at UniversitÃ degli Studi di Milano.
- Cerasi, Vittoria & Daltung, Sonja, 2000. "The optimal size of a bank: Costs and benefits of diversification," European Economic Review, Elsevier, vol. 44(9), pages 1701-1726, October.
- Zeng, Zhixiong, 2011.
"A theory of the non-neutrality of money with banking frictions and bank recapitalization,"
33471, University Library of Munich, Germany.
- Zeng, Zhixiong, 2010. "A theory of the non-neutrality of money with banking frictions and bank recapitalization," MPRA Paper 24752, University Library of Munich, Germany.
- Hellwig, Martin F, 2000.
"Financial Intermediation with Risk Aversion,"
Review of Economic Studies, Wiley Blackwell,
Wiley Blackwell, vol. 67(4), pages 719-42, October.
- Hellwig, Martin, 1998. "Financial Intermediation with Risk Aversion," Sonderforschungsbereich 504 Publications, Sonderforschungsbereich 504, UniversitÃ¤t Mannheim;Sonderforschungsbereich 504, University of Mannheim 98-39, Sonderforschungsbereich 504, UniversitÃ¤t Mannheim;Sonderforschungsbereich 504, University of Mannheim.
- Williamson, Stephen D., 1986.
"Costly monitoring, financial intermediation, and equilibrium credit rationing,"
Journal of Monetary Economics, Elsevier,
Elsevier, vol. 18(2), pages 159-179, September.
- Stephen D. Williamson, 1984. "Costly Monitoring, Financial Intermediation, and Equilibrium Credit Rationing," Working Papers, Queen's University, Department of Economics 583, Queen's University, Department of Economics.
- Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(2), pages 399-415, May.
- Krasa, Stefan & Villamil, Anne P, 1992. "A Theory of Optimal Bank Size," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 725-49, October.
- Stephen D. Williamson, 1989.
"Restrictions on Financial Intermediaries and Implications for Aggregate Fluctuations: Canada and the United States 1870-1913,"
in: NBER Macroeconomics Annual 1989, Volume 4, pages 303-350
National Bureau of Economic Research, Inc.
- Stephen D. Williamson, 1989. "Restrictions on financial intermediaries and implications for aggregate fluctuations: Canada and the United States, 1870-1913," Staff Report, Federal Reserve Bank of Minneapolis 119, Federal Reserve Bank of Minneapolis.
- Stefan Krasa & Anne P. Villamil, 2000. "Optimal Contracts when Enforcement Is a Decision Variable," Econometrica, Econometric Society, Econometric Society, vol. 68(1), pages 119-134, January.
- Williamson, Stephen D, 1987. "Financial Intermediation, Business Failures, and Real Business Cycles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(6), pages 1196-1216, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Simon Angus).
If references are entirely missing, you can add them using this form.