Financial Fragility with SAM?

Financial Fragility with Rational and Irrational Exuberance

This article formalizes investor rationality and irrationality, exuberance and apprehension, to consider the implications of belief formation for the fragility of an economy’s financial structure. The model presented generates a financial structure with portfolio linkages that make it susceptible to contagious financial crises, despite the absence of coordination failures. Investors forecast th...

Governance and Financial Fragility

Bailouts and Financial Fragility

Should policy makers be prevented from bailing out investors in the event of a crisis? I study this question in a model of financial intermediation with limited commitment. When a crisis occurs, the policy maker will respond by transferring resources to those investors facing losses. The anticipation of such a “bailout” distorts ex ante incentives, leading intermediaries to become excessively i...

Savings Gluts and Financial Fragility∗

We investigate the effects of an increase in liquidity (a “savings glut”) on the incentives to originate high quality assets, and on the fragility of the financial sector. Originators incur private costs when originating high quality assets. Assets are subsequently distributed in two markets: A private market where informed intermediaries operate, and an exchange where uninformed investors trad...

Financial fragility and economic fluctuations

This paper proposes a simple prototype model that describes the complex dynamics of a sophisticated monetary economy. The interaction between the current and intertemporal financial constraints on economic units brings about irregular fluctuations at both micro and macro levels. We use qualitative dynamic analysis and numerical simulations to investigate the interaction between financial fragil...