Relative price changes and absolute banking disasters: The role of equilibrium asset price adjustments

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Abstract

Collapsing asset values frequently coincide with wider solvency crises, leaving financial institutions in the position of seizing and liquidating collateral at precisely the moment when the market value is lowest. This paper develops a dynamic general equilibrium model to explore the steady state and dynamic consequences of real exchange rate shocks for equilibrium domestic sectoral asset values-and by extension for domestic banks. The model is applied retroactively to the Chilean financial collapse of 1983.

Original languageEnglish (US)
Pages (from-to)295-311
Number of pages17
JournalEconomic Modelling
Volume24
Issue number2
DOIs
StatePublished - Mar 1 2007

Keywords

  • Asset prices
  • Banking crises
  • General equilibrium
  • International shocks

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