Financial imbalances and financial fragility

Frédéric Boissay

No 1317, Working Paper Series from European Central Bank

Abstract: This paper develops a general equilibrium model to analyse the link between financial imbalances and financial crises. The model features an interbank market subject to frictions and where two equilibria may (co-)exist. The normal times equilibrium is characterized by a deep market with highly leveraged banks. The crisis times equilibrium is characterized by bank deleveraging, a market run, and a liquidity trap. Crises occur when there is too much liquidity (savings) in the economy with respect to the number of (safe) investment opportunities. In effect, the economy is shown to have a limited liquidity absorption capacity, which depends JEL Classification: E21, F36, G01, G21

Keywords: asymmetric information; financial crisis; financial integration; global imbalances; moral hazard (search for similar items in EconPapers)
Date: 2011-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cta, nep-mic and nep-opm
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20111317

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