TY  - JOUR
AU  - He, Zhiguo
AU  - Krishnamurthy, Arvind
TI  - A Macroeconomic Framework for Quantifying Systemic Risk
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 19885
PY  - 2014
Y2  - February 2014
DO  - 10.3386/w19885
UR  - http://www.nber.org/papers/w19885
L1  - http://www.nber.org/papers/w19885.pdf
N1  - Author contact info:
Zhiguo He
University of Chicago
Booth School of Business
5807 S. Woodlawn Avenue
Chicago, IL 60637
Tel: 773/834-3769
E-Mail: zhiguo.he@chicagobooth.edu

Arvind Krishnamurthy
Stanford Graduate School of Business
Stanford University
655 Knight Way
Stanford, CA 94305
E-Mail: akris@stanford.edu
AB  - Systemic risk arises when shocks lead to states where a disruption in financial intermediation adversely affects the economy and feeds back into further disrupting financial intermediation. We present a macroeconomic model with a financial intermediary sector subject to an equity capital constraint. The novel aspect of our analysis is that the model produces a stochastic steady state distribution for the economy, in which only some of the states correspond to systemic risk states. The model allows us to examine the transition from "normal" states to systemic risk states. We calibrate our model and use it to match the systemic risk apparent during the 2007/2008 financial crisis. We also use the model to compute the conditional probabilities of arriving at a systemic risk state, such as 2007/2008. Finally, we show how the model can be used to conduct a macroeconomic "stress test" linking a stress scenario to the probability of systemic risk states.
ER  -