A macroeconomic framework for quantifying systemic risk
AbstractSystemic risk arises when shocks lead to states where a disruption in financial intermediation adversely affects the economy and feeds back into further disrupting financial intermediation. We present a macroeconomic model with a financial intermediary sector subject to an equity capital constraint. The novel aspect of our analysis is that the model produces a stochastic steady state distribution for the economy, in which only some of the states correspond to systemic risk states. The model allows us to examine the transition from “normal” states to systemic risk states. We calibrate our model and use it to match the systemic risk apparent during the 2007/2008 financial crisis. We also use the model to compute the conditional probabilities of arriving at a systemic risk state, such as 2007/2008. Finally, we show how the model can be used to conduct a Fed “stress test” linking a stress scenario to the probability of systemic risk states.
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Bibliographic InfoPaper provided by National Bank of Belgium in its series Working Paper Research with number 233.
Length: 53 pages
Date of creation: Oct 2012
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More information through EDIRC
Liquidity; Delegation; Financial Intermediation; Crises; Financial Friction; Constraints;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G2 - Financial Economics - - Financial Institutions and Services
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-20 (All new papers)
- NEP-BAN-2012-10-20 (Banking)
- NEP-CBA-2012-10-20 (Central Banking)
- NEP-MAC-2012-10-20 (Macroeconomics)
- NEP-RMG-2012-10-20 (Risk Management)
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