Working Paper: CEPR ID: DP15485
Authors: Marcus Miller
Abstract: Could experiencing a health pandemic aid in understanding the nature of financial crisis? It might, for example, help to discriminate between different narratives that claim to do so. In this spirit, two influential accounts of the near-collapse of shadow banking in US financial crisis of 2008 are analysed: one developed by Mark Gertler and Nobuhiro Kiyotaki and the other presented by the Financial Crisis Inquiry Commission of the US Congress.Using a common two-sector framework, key features of these contrasting accounts of the market for banking services are presented, along with their corresponding diagnoses of what precipitated financial crisis. To see what the experience of Covid might imply about their relative credibility, four aspects of the current pandemic are considered: how it began from a small biological shock; how it gets spread by contagion; the significance of externalities; and how it may end with a vaccine. But the reader is left to form his or her own judgement.
Keywords: shadow banking; rating agencies; equity constraints; technology and news shocks; bank runs; epidemic contagion; social contagion
JEL Codes: G01; G24; G41; Y8; Z13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Pandemic (H12) | Financial crises (G01) |
| Biological shock (I12) | Financial crises (G01) |
| Contagion (F65) | Financial crises (G01) |
| Pandemic externalities (D62) | Financial instability (F65) |
| Misleading ratings (Y30) | Panic in financial markets (E44) |
| Behavior of creditors (G33) | Panic in financial markets (E44) |