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A model to analyse financial fragility: applications

By Charles Goodhart, Pojanart Sunirand and Dimitrios P. Tsomocos

Abstract

The purpose of our work is to explore contagious financial crises. To this end, we use simplified, thus numerically solvable, versions of our general model [Goodhart, Sunirand and Tsomocos (2003)]. The model incorporates heterogeneous agents, banks and endogenous default, thus allowing various feedback and contagion channels to operate in equilibrium. Such a model leads to different results from those obtained when using a standard representative agent model. For example, there may be a trade-off between efficiency and financial stability, not only for regulatory policies, but also for monetary policy. Moreover, agents which have more investment opportunities can deal with negative shocks more effectively by transferring ‘negative externalities’ onto others

Topics: HB Economic Theory
Publisher: Financial Markets Group, London School of Economics and Political Science
Year: 2004
OAI identifier: oai:eprints.lse.ac.uk:24680
Provided by: LSE Research Online

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