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Annals of Finance

, Volume 3, Issue 1, pp 37–74 | Cite as

Towards a measure of financial fragility

  • Oriol Aspachs
  • Charles A. E. Goodhart
  • Dimitrios P. Tsomocos
  • Lea Zicchino
Special Issue

Abstract

The paper proposes a measure of financial fragility that is based on economic welfare in a general equilibrium model calibrated against UK data. The model comprises a household sector, three active heterogeneous banks, a central bank/regulator, incomplete markets, and endogenous default. We address the impact of monetary and regulatory policy, credit and capital shocks in the real and financial sectors and how the response of the economy to shocks relates to our measure of financial fragility. Finally we use panel VAR techniques to investigate the relationships between the factors that characterise financial fragility in our model, i.e. banks’ probabilities of default and banks’ profits – to a proxy of welfare.

Keywords

Financial fragility Banks Regulatory policy Monetary policy Equilibrium analysis 

JEL Classification Numbers

C33 C68 E4 E5 G11 G21 

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Copyright information

© Springer-Verlag 2006

Authors and Affiliations

  • Oriol Aspachs
    • 1
  • Charles A. E. Goodhart
    • 1
  • Dimitrios P. Tsomocos
    • 1
    • 2
  • Lea Zicchino
    • 3
  1. 1.London School of Economics, and Financial Markets GroupLondonUK
  2. 2.Said Business School and St. Edmund HallUniversity of OxfordOxfordUK
  3. 3.Bank of EnglandLondonUK

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