Working Paper: NBER ID: w27149
Authors: Daron Acemoglu; Asuman Ozdaglar; James Siderius; Alireza Tahbazsalehi
Abstract: 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.
Keywords: credit freezes; financial networks; interbank lending; policy interventions
JEL Codes: D85; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| anticipation of future liquidity shocks (E44) | ex ante credit freezes (G21) |
| negative shift in the distribution of shocks (D39) | more credit freezes (E51) |
| adverse shifts in liquidity (E44) | complete cessation of credit access across the network (E44) |
| structure of the financial network (G29) | likelihood and nature of credit freezes (G21) |