A DSGE model of banks and financial intermediation with default risk

Michael Wickens

Research in Economics, 2017, vol. 71, issue 3, 636-642

Abstract: This paper takes the view that a major contributing factor to the financial crisis of 2008 was a failure to correctly assess and price the risk of default. In order to analyse default risk in the macroeconomy, a simple general equilibrium model with banks and financial intermediation is constructed in which default-risk can be priced. It is shown how the credit spread can be attributed largely to the risk of default and how excess loan creation may emerge due to different attitudes to risk by borrowers and lenders. The model can also be used to analyse systemic risk due to macroeconomic shocks which may be reduced by holding collateral.

Keywords: Default; Financial crisis; Financial intermediation; Financial frictions; Liquidity shortages; Risk (search for similar items in EconPapers)
JEL-codes: E44 E51 G12 G21 G33 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reecon:v:71:y:2017:i:3:p:636-642

DOI: 10.1016/j.rie.2017.05.004

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