Modelling Financial Instability

Financial instability can have large adverse effects on an economy. One major cause of instability is asset price bubbles. This paper starts by considering how such bubbles can arise due to the expansion of money and credit. The ways in which subsequent financial instability occurs are then discussed. Banking crises can arise due to panics or as a result of the business cycle. Contagion and financial fragility can cause small disturbances to have large effects. Finally, policy issues are touched upon.

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The Cause of the Asset Price Bubbles and Banking Crises

New Paradigm in Macroeconomics ◽

10.1057/9780230506077_17 ◽

2005 ◽

pp. 226-237

Author(s):

Richard A. Werner

Keyword(s):

Asset Price ◽

Banking Crises ◽

Asset Price Bubbles ◽

Price Bubbles

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Explaining asset-price bubbles and banking crises

A History of Financial Crises ◽

10.4324/9781315780870-6 ◽

2014 ◽

pp. 108-141

Keyword(s):

Asset Price ◽

Banking Crises ◽

Asset Price Bubbles ◽

Price Bubbles

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Asset Price Bubbles and Systemic Risk

Review of Financial Studies ◽

10.1093/rfs/hhaa011 ◽

2020 ◽

Vol 33 (9) ◽

pp. 4272-4317

Author(s):

Markus Brunnermeier ◽

Simon Rother ◽

Isabel Schnabel

Keyword(s):

Systemic Risk ◽

Asset Price ◽

Financial Fragility ◽

Asset Price Bubbles ◽

Price Bubbles ◽

Oxford University ◽

Level Data ◽

Bubble Characteristics ◽

The Relationship ◽

Published Paper

Abstract We analyze the relationship between asset price bubbles and systemic risk, using bank-level data covering almost 30 years. Banks’ systemic risk already rises during a bubble’s buildup and even more so during its bust. The increase in risk strongly differs across banks and by bubble. It depends on bank characteristics (especially bank size) and bubble characteristics and can become very large: in a median real estate bust, systemic risk increases by almost 70% of the median for banks with unfavorable characteristics. These results emphasize the importance of bank-level factors in the buildup of financial fragility during bubble episodes. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

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