Financial Destabilization

Ken-ichi Hashimoto, Ryonghun Im, Takuma Kunieda and Akihisa Shibata
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Ryonghun Im: Kyoto University

No 2103, Discussion Papers from Graduate School of Economics, Kobe University

Abstract: This paper uses a dynamic general equilibrium model to examine whether financial innovations destabilize an economy. Applying a neoclassical production function, we demonstrate that as financial frictions are mitigated, the economy loses stability and a flip bifurcation occurs at a certain level of financial frictions under an empirically plausible elasticity of substitution between capital and labor. Furthermore, the amplitude of fluctuations increases as financial frictions are mitigated and is maximized when the financial market approaches perfection. These outcomes imply that financial innovations are likely to destabilize an economy.

Pages: 30 pages
Date: 2021-02
New Economics Papers: this item is included in nep-cwa, nep-dge and nep-rmg
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http://www.econ.kobe-u.ac.jp/RePEc/koe/wpaper/2021/2103.pdf (application/pdf)

Related works:
Journal Article: Financial destabilization (2022)
Working Paper: Financial Destabilization (2021)
Working Paper: Financial Destabilization (2021)
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