IDEAS home Printed from https://ideas.repec.org/p/wrk/warwec/1207.html
   My bibliography  Save this paper

Externalities and financial crisis – enough to cause collapse?

Author

Listed:
  • Miller, Marcus

    (University of Warwick and CEPR)

  • Zhang, Lei

    (Sichuan University)

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.

Suggested Citation

  • Miller, Marcus & Zhang, Lei, 2019. "Externalities and financial crisis – enough to cause collapse?," The Warwick Economics Research Paper Series (TWERPS) 1207, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:1207
    as

    Download full text from publisher

    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2019/twerp_1207_miller.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Robert Z. Aliber & Gylfi Zoega (ed.), 2019. "The 2008 Global Financial Crisis in Retrospect," Springer Books, Springer, number 978-3-030-12395-6, July.
    2. Mark Gertler & Nobuhiro Kiyotaki & Andrea Prestipino, 2020. "A Macroeconomic Model with Financial Panics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(1), pages 240-288.
    3. Tobias Adrian & Hyun Song Shin, 2014. "Procyclical Leverage and Value-at-Risk," The Review of Financial Studies, Society for Financial Studies, vol. 27(2), pages 373-403.
    4. Marco Del Negro & Gauti Eggertsson & Andrea Ferrero & Nobuhiro Kiyotaki, 2017. "The Great Escape? A Quantitative Evaluation of the Fed's Liquidity Facilities," American Economic Review, American Economic Association, vol. 107(3), pages 824-857, March.
    5. Mark Gertler & Nobuhiro Kiyotaki, 2015. "Banking, Liquidity, and Bank Runs in an Infinite Horizon Economy," American Economic Review, American Economic Association, vol. 105(7), pages 2011-2043, July.
    6. Cerutti, Eugenio & Claessens, Stijn & Laeven, Luc, 2017. "The use and effectiveness of macroprudential policies: New evidence," Journal of Financial Stability, Elsevier, vol. 28(C), pages 203-224.
    7. Paul Krugman, 2018. "Good enough for government work? Macroeconomics since the crisis," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 34(1-2), pages 156-168.
    8. Goodhart,Charles, 2011. "The Basel Committee on Banking Supervision," Cambridge Books, Cambridge University Press, number 9781107007239, October.
    9. George A. Akerlof & Robert J. Shiller, 2015. "Phishing for Phools: The Economics of Manipulation and Deception," Economics Books, Princeton University Press, edition 1, number 10534.
    10. J. B. Taylor & Harald Uhlig (ed.), 2016. "Handbook of Macroeconomics," Handbook of Macroeconomics, Elsevier, edition 1, volume 2, number 2.
    11. Marcus Miller & Songklod Rastapana & Lei Zhang, 2018. "The Blind Monks and the Elephant: Contrasting Narratives of Financial Crisis," Manchester School, University of Manchester, vol. 86(S1), pages 83-109, September.
    12. Ben S. Bernanke, 2018. "The Real Effects of Disrupted Credit: Evidence from the Global Financial Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 49(2 (Fall)), pages 251-342.
    13. Franklin Allen & Elena Carletti, 2011. "The Global Financial Crisis," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.),Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 2, pages 023-047, Central Bank of Chile.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Marcus Miller, 2021. "Choosing the Narrative: the Shadow Banking Crisis in Light of Covid," Open Economies Review, Springer, vol. 32(2), pages 291-310, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marcus Miller, 2021. "Choosing the Narrative: the Shadow Banking Crisis in Light of Covid," Open Economies Review, Springer, vol. 32(2), pages 291-310, April.
    2. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    3. Ferrante, Francesco, 2019. "Risky lending, bank leverage and unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 100-127.
    4. Rottner, Matthias, 2023. "Financial crises and shadow banks: A quantitative analysis," Journal of Monetary Economics, Elsevier, vol. 139(C), pages 74-92.
    5. Andrea Ajello & Nina Boyarchenko & François Gourio & Andrea Tambalotti, 2022. "Financial Stability Considerations for Monetary Policy: Theoretical Mechanisms," Staff Reports 1002, Federal Reserve Bank of New York.
    6. Paul, Pascal, 2020. "A macroeconomic model with occasional financial crises," Journal of Economic Dynamics and Control, Elsevier, vol. 112(C).
    7. Ohdoi, Ryoji, 2024. "Financial shocks to banks, R&D investment, and recessions," Macroeconomic Dynamics, Cambridge University Press, vol. 28(5), pages 999-1022, July.
    8. Mark Gertler & Simon Gilchrist, 2018. "What Happened: Financial Factors in the Great Recession," Journal of Economic Perspectives, American Economic Association, vol. 32(3), pages 3-30, Summer.
    9. Kirstin Hubrich & Daniel F. Waggoner, 2022. "The Transmission of Financial Shocks and Leverage of Financial Institutions: An Endogenous Regime-Switching Framework," FRB Atlanta Working Paper 2022-5, Federal Reserve Bank of Atlanta.
    10. Pablo A. Guerron-Quintana & Tomohiro Hirano & Ryo Jinnai, 2019. "Recurrent Bubbles and Economic Growth," CARF F-Series CARF-F-457, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    11. Poeschl, Johannes & Zhang, Xue, 2018. "Bank Capital Regulation and Endogenous Shadow Banking Crises," MPRA Paper 92529, University Library of Munich, Germany.
    12. Pacicco, Fausto & Serati, Massimiliano & Venegoni, Andrea, 2022. "The Euro Area credit crunch conundrum: Was it demand or supply driven?," Economic Modelling, Elsevier, vol. 106(C).
    13. Stijn Claessens & M Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: a survey," BIS Working Papers 676, Bank for International Settlements.
    14. Daisuke Ikeda & Hidehiko Matsumoto, 2021. "Procyclical Leverage and Crisis Probability in a Macroeconomic Model of Bank Runs," IMES Discussion Paper Series 21-E-01, Institute for Monetary and Economic Studies, Bank of Japan.
    15. Pablo A. Guerron-Quintana & Tomohiro Hirano & Ryo Jinnai, 2021. "Bubbles, Crashes, Ups and Downs in Economic Growth Theory and Evidence," CIGS Working Paper Series 21-006E, The Canon Institute for Global Studies.
    16. Carlos A. Arango & Oscar M. Valencia, 2015. "Macro-Prudential Policy under Moral Hazard and Financial Fragility," Borradores de Economia 878, Banco de la Republica de Colombia.
    17. Dubois, Corinne, 2021. "Deposit insurance and financial integration in the Eurozone: A DSGE model," Economics Letters, Elsevier, vol. 207(C).
    18. José R. Maria & Paulo Júlio, 2018. "An integrated financial amplifier: the role of defaulted loans and occasionally binding constraints in output fluctuations," Working Papers w201813, Banco de Portugal, Economics and Research Department.
    19. Urban, Jörg, 2020. "Credit cycles revisited," Working Paper Series in Economics 146, Karlsruhe Institute of Technology (KIT), Department of Economics and Management.
    20. Coimbra, Nuno, 2020. "Sovereigns at risk: A dynamic model of sovereign debt and banking leverage," Journal of International Economics, Elsevier, vol. 124(C).

    More about this item

    Keywords

    pecuniary externalities ; bank runs ; illiquidity ; Lender of Last Resort ; cross-border banking;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wrk:warwec:1207. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Margaret Nash (email available below). General contact details of provider: https://edirc.repec.org/data/dewaruk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.