The Financial and Macroeconomic Implications of Banking Frictions and Banking Riskiness

Yi Jin () and Zhixiong Zeng

No 14-11, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: This paper develops a model of banking frictions and banking riskiness, the importance of which is highlighted by the recent Global Financial Crisis (GFC). We propose a model-based approach to decompose the effect of a banking riskiness shock into a pure default effect and a risk effect when risk sharing among the depositors is imperfect. Although the default effect is quantitatively more important, the risk effect is not to be neglected. When the shock generates a bank spread similar in value to the peak during the GFC, the overall effect is a decline in employment by 6:57 percent. The pure default effect leads to a 4:76 percent employment decline by a “within-model” measure, and a 5:05 decline by a “between-model” measure. The remaining is attributed to the risk effect.

Keywords: Banking riskiness shocks; two-sided debt contract; default effects; risk effects; financial crisis. (search for similar items in EconPapers)
JEL-codes: D82 D86 E32 E44 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2011-06
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mac
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