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Bad banks choking good banks: simulating balance sheet contagion

Author

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  • Saed Khalil

    (Palestine Monetary Authority, Palestine)

Abstract

We investigate the propagation 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.

Suggested Citation

  • Saed Khalil, 2015. "Bad banks choking good banks: simulating balance sheet contagion," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 12(1), pages 51-72, April.
    • Handle: RePEc:elg:ejeepi:v:12:y:2015:i:1:p51-72
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    More about this item

    Keywords

    credit crunch; contagion; stock-flow consistent models;
    All these keywords.

    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

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