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http://hdl.handle.net/2451/27022
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| Title: | Financial Fragility, Liquidity and Asset Prices |
| Authors: | Allen, Franklin
Gale, Douglas |
| Keywords: | financial crisis
financial fragility
liquidity
sunspots |
| Issue Date: | 6-Sep-2003 |
| Series/Report no.: | S-FI-03-07 |
| Abstract: | We define a financial system to be fragile if small shocks have
disproportionately large effects. In a model of financial
intermediation, we show that small shocks to the demand for liquidity
cause either high asset-price volatility or bank defaults or both.
Furthermore, as the liquidity shocks become vanishingly small, the
asset-price volatility is bounded away from zero. In the limit economy,
with no shocks, there are many equilibria; however, the only equilibria
that are robust to the introduction of small liquidity shocks are those
with non-trivial sunspot activity. |
| URI: | http://hdl.handle.net/2451/27022 |
| Appears in Collections: | Financial Institutions
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