The Wealth Effect View of the Great Recession: A Behavioral Macroeconomic Model with Occasional Financial Fire Sales

Anticipated Banking Panics

The American Economic Review ◽

10.1257/aer.p20161089 ◽

2016 ◽

Vol 106 (5) ◽

pp. 554-559 ◽

Cited By ~ 5

Author(s):

Mark Gertler ◽

Nobuhiro Kiyotaki ◽

Andrea Prestipino

Keyword(s):

Great Recession ◽

Macroeconomic Model ◽

Balance Sheets ◽

The Great Recession ◽

Banking Panics ◽

Harmful Effects

We develop a macroeconomic model with banking instability. Sunspot runs can arise that are harmful to the economy. However, whether a run equilibrium exists depends on fundamentals. In contrast to earlier work, the probability of a sunspot run is the outcome of rational forecast based on fundamentals. The model captures the movement from slow to fast runs that was a feature of the Great Recession: A weakening of banks' balance sheets increases the probability of a run, leading depositors to withdraw funds from banks. These slow runs have harmful effects on the economy and set the stage for fast runs.

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The Economics of Central Clearing

Annual Review of Financial Economics ◽

10.1146/annurev-financial-100520-100321 ◽

2021 ◽

Vol 13 (1) ◽

Author(s):

Albert J. Menkveld ◽

Guillaume Vuillemey

Keyword(s):

Great Recession ◽

Empirical Work ◽

Credit Derivatives ◽

Annual Review ◽

Publication Date ◽

Counterparty Risk ◽

Fire Sales ◽

The Great Recession ◽

Classical Studies ◽

Derivatives Markets

Central clearing counterparties (CCPs) have a variety of economic rationales. The Great Recession of 2007–2009 led regulators to mandate CCPs for most interest-rate and credit derivatives, markets in which large amounts of risks are transferred across agents. This change led to a large increase in CCP studies, which along with classical studies are surveyed in this article. For example, multilateral netting, the insurance against counterparty risk, the effect of CCPs on asset prices and fire sales, margins setting, the default waterfall, and CCP governance are discussed here. We review both CCP theory and empirical work and conclude by discussing regulatory issues. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is March 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

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