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Workers’ debt, default and the diversity of financial fragilities

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  • Charpe, Matthieu
  • Flaschel, Peter

Abstract

This paper presents a model addressing the conditions under which financial instability arises in the event of household debt. The model addresses two main cases. First, household debt is affected by functional income distribution. Second, household debt is affected by credit supply and depends on bank performance. The model shows that financial fragility arises through a Fisher effect in the first case and through a debt financed consumption boom in the second case. The model then explores two extensions. First, we raise the question of debt default and its impact on financial instability. Second, we discuss the ability of capital adequacy ratio to limit financial instability.

Suggested Citation

  • Charpe, Matthieu & Flaschel, Peter, 2013. "Workers’ debt, default and the diversity of financial fragilities," Structural Change and Economic Dynamics, Elsevier, vol. 27(C), pages 48-65.
  • Handle: RePEc:eee:streco:v:27:y:2013:i:c:p:48-65
    DOI: 10.1016/j.strueco.2013.07.001
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    References listed on IDEAS

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    Cited by:

    1. Nikolaidi, Maria, 2014. "Margins of safety and instability in a macrodynamic model with Minskyan insights," Structural Change and Economic Dynamics, Elsevier, vol. 31(C), pages 1-16.

    More about this item

    Keywords

    Households debt; Booms; Commercial banks; Credit rationing; Minsky;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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