Bad Banks Choking Good Banks: Simulating Balance Sheet Contagion

Abstract:     
We investigate the propagation of contagion through banks’ balance sheets in a two-country model. We simulate an increase in non-performing loans in one bank, and study the effects on other banks and the macro economy of each country. We show that credit crunches destabilize each economy in the short run and in the long run reduce potential output. We quantify this loss.

Number of Pages in PDF File: 29

Keywords: Credit crunch, contagion, stock flow consistent models

JEL Classification: E32, E37, E51, G33

working papers series