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A DSGE model of banks and financial intermediation with default risk

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  • Wickens, Michael R.

Abstract

This paper takes the view that a major contributing factor to the financial crisis of 2008 was a failure to correctly assess and price the risk of default. In order to analyse default risk in the macroeconomy, a simple general equilibrium model with banks and financial intermediation is constructed in which default-risk can be priced. It is shown how the credit spread can be attributed largely to the risk of default and how excess loan creation may emerge due different attitudes to risk by borrowers and lenders. The model can also be used to analyse systemic risk due to macroeconomic shocks which may be reduced by holding collateral.

Suggested Citation

  • Wickens, Michael R., 2011. "A DSGE model of banks and financial intermediation with default risk," CEPR Discussion Papers 8556, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:8556
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    References listed on IDEAS

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    Cited by:

    1. Tommaso Trani, 2012. "Countercyclical Capital Regulation and Bank Ownership Structure," IHEID Working Papers 14-2012, Economics Section, The Graduate Institute of International Studies.
    2. Sergio Edwin Torrico Salamanca, 2014. "Macro credit scoring como propuesta para cuantificar el riesgo de crédito," Investigación & Desarrollo, Universidad Privada Boliviana, vol. 2(14), pages 42-63.

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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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