Matching Frictions, Credit Reallocation and Macroeconomic Activity: How Harmful are Financial Crises?

Abstract

This paper develops a macroeconomic model of real-financial market interactions in which the credit and the business cycles reinforce each other according to a bidirectional causal relationship. We do so in the context of a computational agent-based framework, where the channelling of funds from savers to investors occurring through intermediaries is a ected by information frictions. Since banks compete in both the deposit and the loan markets, the whole dynamics is driven by endogenous uctuations in the size of the intermediaries balance sheet. We use the model to show that nancial crisis are particularly harmful when hitting in phase with a real recession, and that when this occurs the loss in real output is permanent.