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Research at St Andrews

A financial accelerator through coordination failure

Research output: Working paperDiscussion paper

Author(s)

Oliver de Groot

School/Research organisations

Abstract

This paper studies the effect of liquidity crises in short-term debt markets in a dynamic general equilibrium framework. Creditors (retail banks) receive imperfect signals regarding the profitability of borrowers (wholesale banks) and, based on these signals and their beliefs about other creditors actions, choose whether to rollover funding, or not. The uncoordinated actions of creditors cause a suboptimal incidence of rollover, generating an illiquidity premium. Leverage magnifies the coordination inefficiency. Illiquidity shocks in credit markets result in sharp contractions in output. Policy responses are analyzed.
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Details

Original languageEnglish
Place of PublicationSt Andrews
PublisherUniversity of St Andrews
Number of pages52
Publication statusPublished - 31 Jan 2019

Publication series

NameSchool of Economics and Finance Discussion Papers
PublisherUniversity of St Andrews
No.1902
ISSN (Print)0962-4031
ISSN (Electronic)2055-303X

    Research areas

  • Financial frictions, DSGE models, Global games, Bank runs, Unconventional monetary policy, Financial crises

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