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Coordinating in Financial Crises

Author

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  • Caio Machado

    (Pontificia Universidad Catolica de Chile)

Abstract

Why do some financial crises lead to macroeconomic disasters, while others barely affect the real economy? This paper proposes a model to study unusually deep financial crises. Deep crises arise from the interplay of demand-driven coordination failures on the productive sector and weak banks' balance sheets. There is a dynamic feedback between banks' balance sheets and coordination. Coordination failures happen when banks suffer large losses and substantially reduce asset prices and welfare, even if the economy is in good times and they rarely happen. Financial crises that start from similar initial shocks can feature very heterogeneous real effects. (Copyright: Elsevier)

Suggested Citation

  • Caio Machado, 2024. "Coordinating in Financial Crises," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 54, October.
    • Handle: RePEc:red:issued:23-96
    DOI: 10.1016/j.red.2024.101236
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    Keywords

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    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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