Liquidity and default in an exchange economy

Martinez, Juan Francisco and Tsomocos, Dimitrios (2016) Liquidity and default in an exchange economy. Journal of Financial Stability.

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Abstract

This paper analyzes various channels of shock transmission in an economy subject to financial frictions, by incorporating liquidity and default effects on asset prices. We develop a framework in which we can assess financial stability policy by introducing a simplified model of exchange and financial intermediation that captures the effects of shocks on financial and real sectors of the economy. The model allows us to explain essential mechanisms and interactions of financial and real economic variables in a comprehensive, yet intuitive fashion. Our results suggest that liquidity and default in the credit markets should be analyzed contemporaneously when financial, monetary and productivity shocks affect financial stability as well as the real economy.

Item Type: Article
Keywords: Default; DSGE; Financial stability; Liquidity; finance
Subject(s): Finance
Date Deposited: 22 Nov 2016 10:31
Date of author-version deposit: 3 November 2016
Last Modified: 12 Jul 2017 10:18
Funders: not applicable
URI: http://eureka.sbs.ox.ac.uk/id/eprint/6245

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