Coordinating in Financial Crises

Caio Machado

Review of Economic Dynamics, 2024, vol. 54

Abstract: Why do some financial crises lead to macroeconomic disasters, while others barely affect the real economy? This paper proposes a model to study unusually deep financial crises. Deep crises arise from the interplay of demand-driven coordination failures on the productive sector and weak banks' balance sheets. There is a dynamic feedback between banks' balance sheets and coordination. Coordination failures happen when banks suffer large losses and substantially reduce asset prices and welfare, even if the economy is in good times and they rarely happen. Financial crises that start from similar initial shocks can feature very heterogeneous real effects. (Copyright: Elsevier)

Keywords: coordination failures; financial frictions; financial crises (search for similar items in EconPapers)
JEL-codes: D84 E32 G10 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1016/j.red.2024.101236

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