Booms and Banking Crises

44 Pages Posted: 19 Aug 2012 Last revised: 17 Nov 2014

See all articles by Frédéric Boissay

Frédéric Boissay

Bank for International Settlements (BIS)

Fabrice Collard

University of Berne - Department of Economics

Frank Smets

European Central Bank (ECB); KU Leuven - Center for Economic Studies

Multiple version iconThere are 3 versions of this paper

Date Written: September 9, 2014

Abstract

Banking crises are rare events that break out in the midst of credit intensive booms and bring about particularly deep and long-lasting recessions. This paper attempts to explain these phenomena within a textbook DSGE model that features a non-trivial banking sector. In the model, banks are heterogeneous with respect to their intermediation skills, which gives rise to an interbank market. Moral hazard and asymmetric information in this market may lead to sudden interbank market freezes, banking crises, credit crunches and, ultimately, severe recessions. The model can potentially generate various types of banking crises. But the typical crisis breaks out endogenously, during a credit boom generated by a sequence of small positive supply shocks; it does not result from a large negative exogenous shock. Simulations of a calibrated version of the model indicate that it can mimic the main dynamic patterns of banking crises.

Keywords: Moral Hazard, Asymmetric Information, Lending Boom, Credit Crunch, Banking Crisis

JEL Classification: E32, E44, G01, G21

Suggested Citation

Boissay, Frédéric and Collard, Fabrice and Smets, Frank, Booms and Banking Crises (September 9, 2014). Available at SSRN: https://ssrn.com/abstract=2131075 or http://dx.doi.org/10.2139/ssrn.2131075

Frédéric Boissay (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Fabrice Collard

University of Berne - Department of Economics ( email )

Schanzeneckstrasse 1
Bern, CH-3001
Switzerland

HOME PAGE: http://fabcol.free.fr

Frank Smets

European Central Bank (ECB) ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
+49 69 1344 6550 (Phone)
+49 69 1344 6575 (Fax)

KU Leuven - Center for Economic Studies ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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