Recent Blog Posts
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The Times' Rorshach Geithner Story
Apr 27 20099:04am EDT -
Sinking Animal Spirits
Apr 27 20098:04am EDT -
Counter-cyclical Urban Policy
Apr 26 200910:04am EDT -
Be Your Own Counterfeiter
Apr 26 20099:04am EDT -
Being Tim Geithner
Apr 25 200912:04pm EDT -
Notes From a Press Conference Naif
Apr 25 20099:04am EDT -
What Good is the News?
Apr 25 20098:04am EDT -
Stressful Enough
Apr 24 20092:04pm EDT -
Not Regretting the Pound
Apr 24 20091:04pm EDT -
Introducing the New Ford Squeeze
Apr 24 20099:04am EDT -
Non-Economic Questions of the Day
Apr 24 20099:04am EDT -
The Stress Test Blind Alley
Apr 24 20098:04am EDT -
Happy Hour
Apr 23 20099:04pm EDT -
Recovery Without Rebalancing
Apr 23 20096:04pm EDT -
The Shape of Your Recession
Apr 23 20095:04pm EDT
Links
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Modelling Financial Stability
Alan Greenspan once complained that "we lack the kind of analytical framework for financial stability that we have for monetary policy" - something which is clearly a problem when central banks are in charge of both things, and especially in times such as now, when the consequences from the former spill over into the latter. Alexander Campbell has found one presentation which seems to have studied the phenomenon reasonably closely; it concludes that
- Under-capitalised banks impose an externality on other banks in the system;
- Decreases in net worth increase the number of contagious defaults and this effect is non-linear;
- Contagion risk first increases with the connectivity of the banking system, then decreases;
- More concentrated banking systems tend to be more prone to systemic meltdown.
All of this seems intuitively true, but as Campbell says, "translating that into real-world policy will be tricky". Still, this is clearly an important avenue of research for central banks around the world: it doesn't matter how good your monetary policy is if you're leaving yourself wide open to a banking crisis.
