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Financial Destabilization

Author

Listed:
  • Ken-ichi Hashimoto

    (Kobe University)

  • Ryonghun Im

    (Kyoto University)

  • Takuma Kunieda

    (Kwansei Gakuin University)

  • Akihisa Shibata

    (Kyoto University)

Abstract
This paper uses a dynamic general equilibrium model to examine whether financial innovations destabilize an economy. Applying a neoclassical production function, we demonstrate that as financial frictions are mitigated, the economy loses stability and a flip bifurcation occurs at a certain level of financial frictions under an empirically plausible elasticity of substitution between capital and labor. Furthermore, the amplitude of fluctuations increases as financial frictions are mitigated and is maximized when the financial market approaches perfection. These outcomes imply that financial innovations are likely to destabilize an economy.

Suggested Citation

  • Ken-ichi Hashimoto & Ryonghun Im & Takuma Kunieda & Akihisa Shibata, 2021. "Financial Destabilization," KIER Working Papers 1054, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:1054
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    More about this item

    Keywords

    Financial innovations; endogenous business cycles; financial destabilization; heterogeneous agents.;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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