NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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James Siderius

Electrical Engineering and Computer Science
77 Massachusetts Ave
32-D640
Cambridge, MA 02139
USA

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Institutional Affiliation: MIT

NBER Working Papers and Publications

May 2020Systemic Credit Freezes in Financial Lending Networks
with Daron Acemoglu, Asuman Ozdaglar, Alireza Tahbaz-Salehi: w27149
This paper develops a network model of interbank lending, in which banks decide to extend credit to their potential borrowers. Borrowers are subject to shocks that may force them to default on their loans. In contrast to much of the previous literature on financial networks, we focus on how anticipation of future defaults may result in ex ante “credit freezes,” whereby banks refuse to extend credit to one another. We first characterize the terms of the interbank contracts and the patterns of interbank lending that emerge in equilibrium. We then study how shifts in the distribution of shocks can result in complex credit freezes that travel throughout the network. We use this framework to analyze the effects of various policy interventions on systemic credit freezes.
 
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