Procyclicality, Collateral Values and Financial Stability

Gai, Prasanna; Kondor, Péter; Vause, Nicholas

doi:10.2139/ssrn.933292

Cited by 9 publications

(9 citation statements)

References 15 publications

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“…However, the social rate of return in period 0 is now captured by λ * . Inequality (22) shows that λ * is smaller or equal than the corresponding expression for the private rate of return.…”

Section: Welfarementioning

confidence: 93%

Inefficient Credit Booms

Lorenzoni

2007

313

446

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Section: Welfarementioning

confidence: 93%

Inefficient Credit Booms

Lorenzoni

2007

313

446

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“…Importantly, if the recovery rate is less than one, the maximum loan‐to‐value ratio will also be less than one. As argued by Gai et al (2006), recovery rates below one may reflect transaction costs built into the specifics of collateral arrangements, such as dispute resolution procedures. Alternatively, there may be human capital loss associated with default.…”

Section: The Modelmentioning

confidence: 99%

Financial Innovation, Macroeconomic Stability and Systemic Crises

Gai

Kapadia

Millard

et al. 2008

The Economic Journal

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We present a general equilibrium model of intermediation designed to capture some of the key features of the modern financial system. The model incorporates financial constraints and state-contingent contracts, and contains a clearly defined pecuniary externality associated with asset fire sales during periods of stress. If a sufficiently severe shock occurs during a credit expansion, this externality is capable of generating a systemic financial crisis that may be self-fulfilling. Our model suggests that financial innovation and greater macroeconomic stability may have made financial crises in developed countries less likely than in the past but potentially more severe. Copyright � Bank of England.

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“…But since these papers do not permit state-contingent financial contracts, the extent to which the underlying externality drives their results is unclear. By contrast, in existing models with state-contingent contracts (Kehoe and Levine, 1993;Krishnamurthy, 2003;Gai et al, 2006;Lorenzoni, 2008), investment projects are never abandoned and crises never occur. Moreover, these papers do not consider the effects of financial innovation or changes in macroeconomic volatility.…”

mentioning

confidence: 97%