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Financial Crisis Cycles

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Listed:
  • Keiichiro Kobayashi
  • Tomoyuki nakajima

Abstract

This paper develops a theoretical model of financial crisis cycles where credit-driven asset price booms are followed by busts and protracted recessions. The accumulation of private debt during booms generates a debt overhang that discourages borrowers from enhancing productivity in the post-crash period. When this debt burden is substantial, coordination failures among creditors delay necessary debt restructuring, leading to a persistent decline in aggregate productivity. We show that bank recapitalization or subsidies, conditional on debt restructuring, are more efficient than unconditional subsidies to borrowing firms, achieving economic recovery at a lower fiscal cost. Furthermore, we demonstrate that borrower subsidies, or expansionary fiscal policy more broadly, can inadvertently prolong stagnation by discouraging banks from restructuring debt.

Suggested Citation

  • Keiichiro Kobayashi & Tomoyuki nakajima, 2026. "Financial Crisis Cycles," CIGS Working Paper Series 26-015E, The Canon Institute for Global Studies.
    • Handle: RePEc:cnn:wpaper:26-015e
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    References listed on IDEAS

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    1. Moritz Schularick & Alan M. Taylor, 2012. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008," American Economic Review, American Economic Association, vol. 102(2), pages 1029-1061, April.
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