Financial Contagion and Financial Lockdowns

Gabriele Camera and Alessandro Gioffré
Authors registered in the RePEc Author Service: Alessandro Gioffré

Working Papers - Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

Abstract: Extreme financial shocks often elicit extraordinary policy interventions that preclude financial activity on a large scale, for example as the 1933 U.S. “bank holiday.†We study these interventions using a random matching framework where the financial contagion process is explicit and the diffusion of the initial shock can be analytically characterized. The study suggests that there is scope for forced closures of individual firms or even economy-wide financial lockdowns only when firms are financially vulnerable and policy institutions are not well-functioning. Here, ordinary policy alone cannot prevent or sufficiently mitigate contagion, while complementing it with a lockdown or individual closures can do so, and improve social welfare if the initial shock is severe but not widespread.

Keywords: matching models; financial crises; contagion (search for similar items in EconPapers)
JEL-codes: C6 D6 E5 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2024
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Related works:
Journal Article: Financial contagion and financial lockdowns (2024)
Working Paper: Financial Contagion and Financial Lockdowns (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:frz:wpaper:wp2024_01.rdf

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