Equilibrium analysis, banking, contagion and financial fragility
This paper contains a General Equilibrium model of an economy with Incomplete Markets (GEI) with money and default. The model is a simplified version of the real world consisting of a non-bank private sector, banks, a Central Bank, a government and a regulator. The model is used to analyse actions b...
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| Format: | Working paper |
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University of Oxford
2003
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| _version_ | 1797073852557164544 |
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| author | Vines, D |
| author_facet | Vines, D |
| author_sort | Vines, D |
| collection | OXFORD |
| description | This paper contains a General Equilibrium model of an economy with Incomplete Markets (GEI) with money and default. The model is a simplified version of the real world consisting of a non-bank private sector, banks, a Central Bank, a government and a regulator. The model is used to analyse actions by policy makers and to identify policy relevant empirical work. Key analytical results are: A financially fragile system need not collapse; efficiency can be improved with policy intervention; and that a system with heterogeneous banks is more stable than one with homogeneous ones. Existence of monetary equilibria allows for positive default levels in equilibrium. It also characterises contagion and financial fragility as an equilibrium phenomenon. A definition of financial fragility is proposed. Financial fragility occurs when aggregate profitability of the banking sector declines and defaults in the non-bank private and the banking sectors increase. Thus, equilibria with financial fragility require financial vulnerability in the banking sector and liquidity shortages in the non-bank private sector. The model will be used as a basis to carry out empirical work on the costs of financial instability, to quantify the effectiveness of particular regulatory tools such as capital requirements, and to identify tradeoffs between increasing stability through action by authorities and the efficiency of the financial system. Keywords: Financial fragility, contagion, competitive banking, capital requirements, incomplete markets, default. |
| first_indexed | 2024-03-06T23:27:52Z |
| format | Working paper |
| id | oxford-uuid:6b0420fe-3022-4054-b203-fb0028832d83 |
| institution | University of Oxford |
| last_indexed | 2024-03-06T23:27:52Z |
| publishDate | 2003 |
| publisher | University of Oxford |
| record_format | dspace |
| spelling | oxford-uuid:6b0420fe-3022-4054-b203-fb0028832d832022-03-26T19:01:04ZEquilibrium analysis, banking, contagion and financial fragilityWorking paperhttp://purl.org/coar/resource_type/c_8042uuid:6b0420fe-3022-4054-b203-fb0028832d83Bulk import via SwordSymplectic ElementsUniversity of Oxford2003Vines, DThis paper contains a General Equilibrium model of an economy with Incomplete Markets (GEI) with money and default. The model is a simplified version of the real world consisting of a non-bank private sector, banks, a Central Bank, a government and a regulator. The model is used to analyse actions by policy makers and to identify policy relevant empirical work. Key analytical results are: A financially fragile system need not collapse; efficiency can be improved with policy intervention; and that a system with heterogeneous banks is more stable than one with homogeneous ones. Existence of monetary equilibria allows for positive default levels in equilibrium. It also characterises contagion and financial fragility as an equilibrium phenomenon. A definition of financial fragility is proposed. Financial fragility occurs when aggregate profitability of the banking sector declines and defaults in the non-bank private and the banking sectors increase. Thus, equilibria with financial fragility require financial vulnerability in the banking sector and liquidity shortages in the non-bank private sector. The model will be used as a basis to carry out empirical work on the costs of financial instability, to quantify the effectiveness of particular regulatory tools such as capital requirements, and to identify tradeoffs between increasing stability through action by authorities and the efficiency of the financial system. Keywords: Financial fragility, contagion, competitive banking, capital requirements, incomplete markets, default. |
| spellingShingle | Vines, D Equilibrium analysis, banking, contagion and financial fragility |
| title | Equilibrium analysis, banking, contagion and financial fragility |
| title_full | Equilibrium analysis, banking, contagion and financial fragility |
| title_fullStr | Equilibrium analysis, banking, contagion and financial fragility |
| title_full_unstemmed | Equilibrium analysis, banking, contagion and financial fragility |
| title_short | Equilibrium analysis, banking, contagion and financial fragility |
| title_sort | equilibrium analysis banking contagion and financial fragility |
| work_keys_str_mv | AT vinesd equilibriumanalysisbankingcontagionandfinancialfragility |