Discussion Paper Details

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Title: Externalities and financial crisis - enough to cause collapse?

Author(s): Marcus Miller and Lei Zhang

Publication Date: July 2019

Keyword(s): bank runs, cross-border banking, Illiquidity, lender of last resort and Pecuniary externalities

Programme Area(s): Financial Economics

Abstract: After the boom in US subprime lending came the bust - with a run on US shadow banks. The magnitude of boom and bust were, it seems, amplified by two significant externalities triggered by aggregate shocks: the endogeneity of bank equity due to mark-to-market accounting and of bank liquidity due to 'fire-sales' of securitised assets. We show how adding a systemic 'bank run' to the canonical model of Adrian and Shin allows for a tractable analytical treatment - including the counterfactual of complete collapse that forces the Treasury and the Fed to intervene.

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Bibliographic Reference

Miller, M and Zhang, L. 2019. 'Externalities and financial crisis - enough to cause collapse?'. London, Centre for Economic Policy Research.