A macroeconomic model of liquidity crises

Keiichiro Kobayashi and Tomoyuki Nakajima

No 14-003E, CIGS Working Paper Series from The Canon Institute for Global Studies

Abstract: We develop a simple macroeconomic model that captures key features of a liquidity crisis. During a crisis, the supply of short-term loans vanishes, the interest rate rises sharply, and the level of economic activity declines. A crisis may be caused either by self-ful lling beliefs or by fundamental shocks. It occurs as a result of market failure due to debt overhang in short-term loans. The government's commitment to deposit guarantee reduces the likelihood of self-ful lling crisis but increases that of fundamental crisis.

Pages: 32
Date: 2014-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Working Paper: A macroeconomic model of liquidity crises (2017)
Working Paper: A macroeconomic model of liquidity crises (2014)
Working Paper: A macroeconomic model of liquidity crises (2014)
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