European Journal of Economics and Economic Policies: Intervention

Bad banks choking good banks: simulating balance sheet contagion

Saed Khalil * and Stephen Kinsella *

Keywords: credit crunch, contagion, stock-flow consistent models


We investigate the propagation of contagion through banks’ balance sheets in a two-country model. We simulate an increase in non-performing loans in one bank, and study the effects on other banks and the macro-economy of each country. We show that credit crunches destabilize each economy in the short run and in the long run reduce potential output. We quantify this loss.

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