A Macroeconomic Framework for Quantifying Systemic Risk
By Zhiguo He, Arvind Krishnamurthy. American Economic Journal: Macroeconomics, 2019
178 citations recorded by the source corpus.
Systemic risk arises when shocks lead to states where a disruption in financial intermediation adversely affects the economy and feeds back into further disrupting financial intermediation. We present a macroeconomic model with a financial intermediary sector subject to an equity capital constraint. The novel aspect of our analysis is that the model produces a stochastic steady state distribution for the economy, in which only some of the states correspond to systemic risk states. The model allows us to examine the transition from “normal” states to systemic risk states. We calibrate our model and use it to match the systemic risk apparent during the 2007/2008 financial crisis. We also use the model to compute the conditional probabilities of arriving at a systemic risk state, such as 2007/2008. Finally, we show how the model can be used to conduct a macroeconomic “stress test” linking a stress scenario to the probability of systemic risk states. (JEL E13, E44, E52, G01, G21, G28)
View Paper: https://www.semanticscholar.org/paper/0828f061afbbedd82ed4bf6eee3fc6fced66a655
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Citations in the corpus
- Uncertainty Shocks and Balance Sheet Recessions (2017, background): “If m was constant, experts would lose 77 percent of their net worth in the model.20 For the sake of comparison, He and Krishnamurthy (2014) report that in the same period fi- 19 In this simple model only TFP shocks to effective capital k can affect output y 5 ak in the short run.”
- Sensitive industries produce better ESG performance: Evidence from emerging markets (2017, background): “However, the absence of stress does not necessarily trigger a macroeconomic boom (Gertler and Kiyotaki, 2010; Mendoza, 2010; He and Krishnamurthy, 2012; Giglio et al., 2016).”