Traditionally, economic growth and business cycles have been treated independently. However, the dependence of GDP levels on its history shocks, what economists refer to as “hysteresis,” argues for unifying analysis cycles. In this paper, we review recent empirical theoretical literature that motivates paradigm shift. The renewed interest in hysteresis (or “scarring” parlance) has sparked by pe...

We analyse the links between credit default swap (CDS) and bond spreads and try to determine which one is the leading market in the price discovery process. To do that, we construct a sample of CDS premia and bonds spreads on a generic 5-year bond, for 17 financials and 18 sovereigns. First, we run VECM estimations, showing that the CDS market has a lead over the bond market over the whole samp...

This paper develops a tractable macroeconomic model with a banking sector in which banks face endogenous borrowing constraints. There is no uncertainty about economic fundamentals. Banking bubbles can emerge through a positive feedback loop mechanism. Changes in household confidence can cause the bubbles to burst, resulting in a financial crisis. Credit policy can mitigate economic downturns. T...

Article history: Received 11 September 2014 Received in revised form 17 April 2015 Accepted 25 April 2015 Available online 2 May 2015 Westudy the impact of sovereign risk on the credit risk of the non-financial corporate sector in the Eurozone using credit default swap data. We show that an increase in sovereign credit spreads is associated with a statistically and economically significant incr...

We study the connection between banking crises and non-life insurance consumption in 139 countries from 1988 to 2010. After controlling for output, we find a negative excess decline in non-life insurance consumption after the occurrence of a banking crisis only in countries heavily depending on bank credit. The primary contributing factor is motor insurance which loses 113% of the annual premiu...

This paper investigates the mechanism through which short selling of a bank’s stocks can trigger the failure of the bank. In the model, creditors, who learn information from stock prices, will grow increasingly unsure about the bank’s true fundamentals in facing noisier stock prices; thus a run on the bank is more likely because of creditors’ concave payo¤. Understanding this, speculators condu...

Networks constructed from credit relationships in the interbank market have been found to exhibit disassortative mixing together with a scale-free degree distribution, in contrast to most social networks that are assortative and not necessarily scale-free. This provokes the question whether generating mechanisms for scale-free networks have enough flexibility to generate both assortative and di...

This paper uses a risk-shifting model to analyze policy responses asset price booms. We show risk shifting leads inefficient and credit booms in which prices can exceed fundamentals. However, the inefficiencies associated with arise independently of whether is bubble. Given evidence shifting, policymakers may not need determine if assets are bubbles justify intervention. then that some main can...