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Liquidity and default in an exchange economy

Juan Francisco Martínez S. and Dimitrios Tsomocos

Journal of Financial Stability, 2018, vol. 35, issue C, 192-214

Abstract: This paper analyzes various channels of shock transmission in an economy subject to financial frictions, by incorporating liquidity and default effects on asset prices. We develop a framework in which we can assess financial stability policy by introducing a simplified model of exchange and financial intermediation that captures the effects of shocks on financial and real sectors of the economy. The model allows us to explain essential mechanisms and interactions of financial and real economic variables in a comprehensive, yet intuitive fashion. Our results suggest that liquidity and default in the credit markets should be analyzed contemporaneously when financial, monetary and productivity shocks affect financial stability as well as the real economy.

Keywords: Default; DSGE; Financial stability; Liquidity (search for similar items in EconPapers)
JEL-codes: D51 D52 E43 E44 E58 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:finsta:v:35:y:2018:i:c:p:192-214