Arbeitspapier
Knightian uncertainty and credit cycles
The Great Recession has been characterised by the two stylized facts: the buildup of leverage in the household sector in the period preceding the recession and a protracted economic recovery that followed. We attempt to explain these two facts as an information friction, whereby agents are uncertain about a new state of the economy following a financial innovation. To this end, we extend Boz and Mendoza (2014) by explicitly modelling the credit markets and by modifying the learning to an adaptive set-up. In our model the build-up of leverage and the collateral price cycles takes longer than in a stylized DSGE model with financial frictions. The boom-bust cycles occur as rare events, with two systemic crises per century. Financial stability is achieved with an LTV-cap regulation which smooths the leverage cycles through quantity (higher equity participation requirement) and price (lower collateral value) effects, as well as by providing an anchor in the learning process of agents.
- ISBN
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978-92-899-2790-1
- Language
-
Englisch
- Bibliographic citation
-
Series: ECB Working Paper ; No. 2068
- Classification
-
Wirtschaft
Information and Market Efficiency; Event Studies; Insider Trading
Financial Forecasting and Simulation
Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
Financial Markets and the Macroeconomy
Central Banks and Their Policies
- Subject
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uncertainty
financial engineering
deregulation
leverage forecasting
macroprudential policy
- Event
-
Geistige Schöpfung
- (who)
-
Gerba, Eddie
Żochowski, Dawid
- Event
-
Veröffentlichung
- (who)
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European Central Bank (ECB)
- (where)
-
Frankfurt a. M.
- (when)
-
2017
- DOI
-
doi:10.2866/675402
- Handle
- Last update
-
10.03.2025, 11:43 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Gerba, Eddie
- Żochowski, Dawid
- European Central Bank (ECB)
Time of origin
- 2017
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