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Model analysis of the link between interest rates and crashes

Author

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  • Broga, Kristijonas M.
  • Viegas, Eduardo
  • Jensen, Henrik Jeldtoft

Abstract

We analyse the effect of distinct levels of interest rates on the stability of the financial network under our modelling framework. We demonstrate that banking failures are likely to emerge early on under sustained high interest rates, and at much later stage–with higher probability–under a sustained low interest rate scenario. Moreover, we demonstrate that those bank failures are of a different nature: high interest rates tend to result in significantly more bankruptcies associated to credit losses whereas lack of liquidity tends to be the primary cause of failures under lower rates.

Suggested Citation

  • Broga, Kristijonas M. & Viegas, Eduardo & Jensen, Henrik Jeldtoft, 2016. "Model analysis of the link between interest rates and crashes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 457(C), pages 225-238.
    • Handle: RePEc:eee:phsmap:v:457:y:2016:i:c:p:225-238
    DOI: 10.1016/j.physa.2016.03.054
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    References listed on IDEAS

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