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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
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2019/twerp_1207_miller.pdf
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    References listed on IDEAS

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    1. Robert Z. Aliber & Gylfi Zoega (ed.), 2019. "The 2008 Global Financial Crisis in Retrospect," Springer Books, Springer, number 978-3-030-12395-6, December.
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    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.

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    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

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