A Model to Analyse Financial Fragility
AbstractThis paper sets out a tractable model which illuminates problems relating to individual bank behaviour, to possible contagious inter-relationships between banks, and to the appropriate design of prudential requirements and incentives to limit `excessive' risk-taking. Our model is rich enough to include heterogeneous agents, endogenous default, and multiple commodity, and credit and deposit markets. Yet, it is simple enough to be effectively computable and can therefore be used as a practical framework to analyse financial fragility. Financial fragility in our model emerges naturally as an equilibrium phenomenon. Among other results, a non-trivial quantity theory of money is derived, liquidity and default premia co-determine interest rates, and both regulatory and monetary policies have non-neutral effects. The model also indicates how monetary policy may affect financial fragility, thus highlighting the trade-off between financial stability and economic efficiency.
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Bibliographic InfoPaper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2003fe13.
Date of creation: 2003
Date of revision:
Other versions of this item:
- NEP-ALL-2003-11-03 (All new papers)
- NEP-FIN-2003-11-03 (Finance)
- NEP-MFD-2003-11-03 (Microfinance)
- NEP-MON-2003-11-03 (Monetary Economics)
- NEP-RMG-2003-11-03 (Risk Management)
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