A model to analyse financial fragility: applications

Working paper

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 di.erent results from those obtained when using a standard representative agent model. For example, there may be a trade-o. between e.ciency 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.

Authors: Goodhart, C; Sunirand, P

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Publication date: 2004-02-01
• Paper number: 2004-FE-05
• Keywords: monetary policy; regulatory policy; financial fragility; competitive banking; general equilibrium