Uncertainty in an Interconnected Financial System, Contagion, and Market Freezes
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 creditorsâ€™ 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 Queen's University, Department of Economics in its series Working Papers with number 1308.
Length: 51 pages
Date of creation: May 2013
Date of revision:
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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-06-04 (All new papers)
- NEP-BAN-2013-06-04 (Banking)
- NEP-CBA-2013-06-04 (Central Banking)
- NEP-NET-2013-06-04 (Network Economics)
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