Progress masks greater threat of severe crisis

Financial innovation and greater macroeconomic stability may have made financial crises in developed countries less likely than in the past, but potentially more severe, research published by the Bank of England finds.

The research, which uses a general equilibrium model, also suggests that if a credit expansion precipitates a sufficiently severe shock, the spillovers can generate a systemic financial crisis that may be self-fulfilling.

The model used incorporates financial constraints and

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