Bad banks choking good banks: Simulating balance sheet contagion

Saed Khalil; Stephen Kinsella

doi:10.4337/ejeep.2015.01.06

Bad banks choking good banks: Simulating balance sheet contagion

Saed Khalil
, Stephen Kinsella

Palestine Monetary Authority

Research output: Contribution to journal › Article › peer-review

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.

Original language	English
Pages (from-to)	51-72
Number of pages	22
Journal	European Journal of Economics and Economic Policies: Intervention
Volume	12
Issue number	1
DOIs	https://doi.org/10.4337/ejeep.2015.01.06
Publication status	Published - Apr 2015

Keywords

Contagion
Credit crunch
Stock-flow consistent models

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10.4337/ejeep.2015.01.06

Cite this

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title = "Bad banks choking good banks: Simulating balance sheet contagion",

abstract = "We investigate the propagation of contagion through banks{\textquoteright} 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.",

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AB - 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.

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KW - Credit crunch

KW - Stock-flow consistent models

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Bad banks choking good banks: Simulating balance sheet contagion

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Keywords

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