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Bad banks choking good banks: simulating balance sheet contagion

Author

Listed:
  • Saed Khalil

    (Palestine Monetary Authority & Birzeit University)

  • Stephen Kinsella

    (Kemmy Business School, University of Limerick)

Abstract

We investigate the propogation 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 & Stephen Kinsella, 2011. "Bad banks choking good banks: simulating balance sheet contagion," Working Papers 201126, Geary Institute, University College Dublin.
    • Handle: RePEc:ucd:wpaper:201126
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    File URL: http://www.ucd.ie/geary/static/publications/workingpapers/gearywp201126.pdf
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    Citations

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    Cited by:

    1. Di Guilmi, Corrado & Carvalho, Laura, 2017. "The dynamics of leverage in a demand-driven model with heterogeneous firms," Journal of Economic Behavior & Organization, Elsevier, vol. 140(C), pages 70-90.
    2. Corrado Di Guilmi & Laura Carvalho, 2015. "The dynamics of leverage in a Minskyan model with heterogeneous firms," Working Papers, Department of Economics 2015_15, University of São Paulo (FEA-USP).
    3. Laura Barbosa de Carvalho, 2012. "Current Account Imbalances and Economic Growth: a two-country model with real-financial linkages," Working Papers 1203, New School for Social Research, Department of Economics.

    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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