skip to primary navigationskip to content

CF weekly workshop - Oliver de Groot

When Apr 26, 2011
from 05:00 PM to 06:00 PM
Where Winstanley Lecture Theatre, Trinity College
Contact Name
Add event to calendar vCal

** Please note the start time **

Oliver de Groot (Faculty of Economics)

Title: Coordination Failure and Financial Accelerator

This paper studies the effect of short-term uncoordinated creditors in a DSGE model with leveraged borrowers. Creditors (financial intermediaries) receive imperfect signals regarding the profitability of borrowers (entrepreneurs) and, based on these signals and their beliefs about other intermediaries' actions, choose between rolling over and foreclosing on the debt. The global games methodology is employed to determine uniquely the behavior of intermediaries in equilibrium. Due to the uncoordinated actions of intermediaries, the incidence of rollover is suboptimal, generating an illiquidity risk premium on external finance. As entrepreneurs become more leveraged, the size of the inefficiencies increase as do the premiums paid on external finance. In addition, we find that the elasticity of the illiquidity risk premium with respect to leverage is higher when (i) intermediaries are close substitutes for the entrepreneurs, and (ii) when the intra-period illiquidity of capital stock is higher. The interaction between entrepreneurial net worth, leverage and the illiquidity risk premium propagates technology shocks, similar in nature to the financial accelerator. Moreover, the model predicts that persistent illiquidity shocks generate disproportionately severe and long recessions.  Further, we analyze two unconventional policy responses to an illiquidity crisis in credit markets: direct lending and equity injections.

Financial accelerator, Business cycles, Global games, Coordination failure

D82, E32, E44, G12


« March 2018 »

RSS Feed Latest news

Best Student Paper Award 2018 - registration is now closed

Feb 02, 2018

For the last ten years, Cambridge Finance is offering its Best Student Paper Award. The award comprises a cash honorarium of £1,000 and a certificate is awarded to the author of the best student paper in finance presented during the 2017-2018 academic year.

View all news