Financial Innovation, Macroeconomic Stability and Systemic Crises

Prasanna Gai, Sujit Kapadia, Stephen Millard and Ander Perez

Economic Journal, 2008, vol. 118, issue 527, 401-426

Abstract: We present a general equilibrium model of intermediation designed to capture some of the key features of the modern financial system. The model incorporates financial constraints and state‐contingent contracts, and contains a clearly defined pecuniary externality associated with asset fire sales during periods of stress. If a sufficiently severe shock occurs during a credit expansion, this externality is capable of generating a systemic financial crisis that may be self‐fulfilling. Our model suggests that financial innovation and greater macroeconomic stability may have made financial crises in developed countries less likely than in the past but potentially more severe.

Date: 2008
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https://doi.org/10.1111/j.1468-0297.2007.02127.x

Related works:
Journal Article: Financial Innovation, Macroeconomic Stability and Systemic Crises (2008)
Working Paper: Financial innovation, macroeconomic stability and systemic crises (2008)
Journal Article: Financial innovation, macroeconomic stability and systemic crises (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:econjl:v:118:y:2008:i:527:p:401-426

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