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Financial Intermediation, Sudden Stops and Financial Crises

Albert Queralto and Ozge Akinci ()
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Albert Queralto: Federal Reserve Board

No 1332, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: This paper develops a small open economy business cycle model with financial intermediaries (banks) in which banks' endogenous leverage constraints are occasionally binding. The model can account for financial crashes and sudden stops as a result of the amplification and asymmetry induced by the leverage constraint. When the leverage constraint is not binding, the model mimics the responses of macroeconomic aggregates to shocks of a typical frictionless real business cycle model. The constraint binds only if banks' leverage is sufficiently high. When this happens, the economy may experience a severe financial crisis in response to typical realizations of shocks. The theoretical framework developed in the paper is suitable to study the effectiveness of ex-ante macroeconomic policies designed to eliminate the excessive risk taking of financial intermediaries in the face of high and volatile capital flows.

Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:1332

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More papers in 2013 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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