Bad banks choking good banks: simulating balance sheet contagion
AbstractWe investigate the propogation of contagion through banks' balance sheets in a two-country model. We simulate an increase in non-performing loans in one bank, and study the effects on other banks and the macro economy of each country. We show that credit crunches destabilize each economy in the short run and in the long run reduce potential output. We quantify this loss.
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Bibliographic InfoPaper provided by Geary Institute, University College Dublin in its series Working Papers with number 201126.
Length: 29 pages
Date of creation: 06 Oct 2011
Date of revision:
credit crunch; contagion; stock flow consistent models;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-15 (All new papers)
- NEP-BAN-2011-10-15 (Banking)
- NEP-MAC-2011-10-15 (Macroeconomics)
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