Dimitrios P. Tsomocos

Dimitrios P. Tsomocos
University of Oxford | OX · Saïd Business School

Ph.D. in Economics

About

111
Publications
19,986
Reads
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1,898
Citations
Additional affiliations
June 2002 - present
University of Oxford
Position
  • University Reader in Financial Economics

Publications

Publications (111)
Article
A computable general equilibrium (CGE) model is used as a regulatory tool for the banking sector in South Africa. The model is used to determine the effects of regulatory penalties, capital adequacy requirements (CAR) and the monetary policy on the economy. Our results indicate that there is a trade‐off between the default and the CAR regulation. F...
Article
Full-text available
We show that the path of inflation under quantitative easing policies that target interest rates, is determinate in the presence of default. We achieve this through different payoff profiles that a collateralised defaultable bond achieves in different states of nature with distinct default outcomes. In the model, heterogeneous households trade this...
Article
Full-text available
In this article a banking sector Computable general equilibrium (CGE) model for South Africa is developed. The model is used to estimate the potential effect of regulatory policy on the economy and as a risk assessment tool to assess how changes in regulation affect the economy. The model provides a methodology for regulators of the banking sector...
Article
We study the effectiveness of three common bank resolution mechanisms: bailouts, bank sales, and ‘bad banks’. We first apply the financial fragility model of Goodhart et al. (2005, 2006a) to analyze the impact of these resolution mechanisms on bank behavior. We then use a novel bank-level database on 39 countries that used these resolution mechanis...
Article
Full-text available
We quantify the effect of macroprudential policy in mitigating domestic and foreign shocks to a small open commodity based economy estimated on Chilean data. The model features a heterogeneous banking sector and includes financial frictions through collateralized borrowing and unsecured loans with the possibility of endogenous haircuts or default....
Book
Mainstream macromodels have assumed away financial frictions, in particular default. The minimum addition in order to introduce financial intermediaries, money, and liquidity into such models is the possibility of default. This, in turn, requires that institutions and price formation mechanisms become a modeled part of the process, or a “playable g...
Article
Most discussions of the Greek debt overhang have focussed on the implications for Greece. We show that when additional funds released to the debtor (Greece), via debt restructuring, are used efficiently in pursuit of a practicable business plan, then both debtor and creditor can benefit. We examine a dynamic two country model calibrated to Greek an...
Article
Full-text available
Cambridge Core - Economic Theory - The Changing Fortunes of Central Banking - edited by Philipp Hartmann
Article
This article addresses the question of how competition for investments among companies in a certain industry affects their capital structure. The authors develop a new modelling framework that simulates financial variables of a set of firms in a given sector, and uses the framework to analyze how such firms compete for new investments. The leverage...
Article
Full-text available
We modify the Diamond and Dybvig (1983) model of banking to jointly study various regulations in the presence of credit and run risk. Banks choose between liquid and illiquid assets on the asset side, and between deposits and equity on the liability side. The endogenously determined asset portfolio and capital structure interact to support credit e...
Article
This paper analyzes various channels of shock transmission in an economy subject to financial frictions, by incorporating liquidity and default effects on asset prices. We develop a framework in which we can assess financial stability policy by introducing a simplified model of exchange and financial intermediation that captures the effects of shoc...
Research
A central bank possesses various instruments to provide liquidity. These are either outright monetary transactions (OMT) of securities or other re�financing facilities, primarily repos, which are executed with standard tenders. The eligible securities (i.e. bonds or equities) need to conform with certain credit risk criteria (i.e., satisfactory cre...
Article
The worst and longest depressions have tended to occur after periods of prolonged, and reasonably stable, prosperity. This results in part from agents rationally updating their expectations during good times and hence becoming more optimistic about future economic prospects. Investors then increase their leverage and shift their portfolios toward p...
Article
Full-text available
We examine the role that credit risk in the central bank’s monetary operations plays in the determination of the equilibrium price level and allocations. Our model features trade in fiat money, real assets and a monetary authority which injects money into the economy through short-term and long-term loans to agents. Short-term loans are riskless, b...
Article
This paper proposes a finite horizon general equilibrium model of international finance with fiat money, hetergeneous agents, multiple goods, multiple assets, multiple countries each with their own money supply, default and regulation. Nominal and real determinacy is obtained and money is non-neutral. IMED provides a coherent framework consistent w...
Article
This paper proposes a metric for a financial fragility index for the Chinese banking sector. This metric is a weighted average of two variables: bank profitability and multiple probability of undercapitalization. The weights of the two variables are assigned based on their effects on real output, estimated by a vector autoregressive model. The main...
Article
Full-text available
The purpose of this paper is to create a financial fragility model for the Czech financial sector. We adapt the Goodhart-Tsomocos model which is based on general equilibrium with incomplete markets, money and default. The calibration of the model is based on publicly available data from the period 2003-2011. Finally, we perform comparative statics...
Article
This paper assesses the role that monetary policy plays in the decision to default using a General Equilibrium model with collateralized loans, trade in fiat money and production. Long-term nominal loans are backed by collateral, the value of which depends on monetary policy. The decision to default is endogenous and depends on the relative value o...
Article
The drafting of macroprudential regulation is largely being driven by the need by policy makers to meet timetables that have been agreed. The legislative drive is taking place without any clear theoretical framework to organise the objectives. In this article we propose two principles that any satisfactory framework ought to respect and then descri...
Article
Full-text available
We analyze a variant of the Diamond-Dybvig (1983) model of banking in which savers can use a bank to invest in a risky project operated by an entrepreneur. The savers can buy equity in the bank and save via deposits. The bank chooses to invest in a safe asset or to fund the entrepreneur. The bank and the entrepreneur face limited liability and ther...
Article
Macroprudential polices broadly refer to the regulations that promote financial stability. As such, they have been highly endorsed by central bankers. In this chapter, the authors propose three principles for improving macroprudential regulation. They argue that macroprudential frameworks should incorporate forward-looking behaviour and should acco...
Article
Full-text available
This paper provides a quantitative metric for financial stability of Korean commercial banking system based on the Tsomocos (J Math Econ 39(5–6):619–655, 2003) model, for which we use market data as proxies for probabilities of default and equity valuation of the banking sector. We estimate the effect of the probability of default and the equity va...
Article
Full-text available
We study a monetary economy with two large open economies displaying net real and financial flows. If default on cross-border loans is possible, taxing financial flows can reduce its negative consequences. In doing so it can improve welfare unilaterally, in some cases in a Pareto sense, via altering the terms of trade and reducing the costs of such...
Article
We show that, in a monetary equilibrium, trade and asset prices depend on both the supply of the liquidity by the Central Bank and the liquidity of assets and commodities. As a result, monetary aggregates are informative for the conduct of monetary policy. We also show asset prices are higher in liquidity-constrained states of nature. This generate...
Article
Full-text available
In this companion paper to Goodhart et al. (2012), we explore the interactions of various types of financial regulation. We find that regulations that control fire-sale risk are critical for delivering financial stability and improving the welfare of savers and borrowers. We describe the combinations of capital regulations, margin requirements, liq...
Article
This study aims to refine and improve existing dynamic stochastic general equilibrium (DSGE) models in two ways. First, it incorporates hitherto neglected components such as endogenous default, money via cash-in-advance (CIA) constraints and heterogenous banking sectors. Thus, in stark contrast to the New Keynesian approach, liquidity and default a...
Article
This paper explores how different types of financial regulation could combat many of the phenomena that were observed in the financial crisis of 2007 to 2009. The primary contribution is the introduction of a model that includes both a banking system and a “shadow banking system” that each help households finance their expenditures. Households some...
Book
The maintenance of financial stability is a key objective of monetary policy, but the record of regulators in achieving this has been lamentable in recent years. This failure has been matched by an equivalent inability to establish an appropriate theoretical basis for financial regulation. In this book, the authors demonstrate how to enhance the th...
Book
The achievement of financial stability is one of the most pressing issues today. This timely and innovative book provides an analytical framework to assess financial (in)stability as an equilibrium phenomenon compatible with the orderly functioning of a modern market economy. The authors expertly show how good regulatory policy can be implemented...
Article
This paper explores how different types of financial regulation could combat many of the phenomena that were observed in the financial crisis of 2007 to 2009. The primary contribution is the introduction of a model that includes both a banking system and a “shadow banking system” that each help households finance their expenditures. Households some...
Article
Busts after periods of prolonged prosperity have been found to be catastrophic. Financial institutions increase their leverage and shift their portfolios towards projects that were previously considered too risky. This results from institutions rationally updating their expectations and becoming more optimistic about the future prospects of the eco...
Article
The purpose of this paper is to assess the choice between adopting a monetary base or an interest rate setting instrument to maintain financial stability. Our results suggest that the interest rate instrument is preferable, since during times of a panic or financial crisis the Central Bank automatically satisfies the increased demand for money. Thu...
Article
Full-text available
What is the main limitation of much modern macroeconomic theory, among the failings pointed out by William R. White at the 2010 Mayekawa Lecture? We argue that the main deficiency is a failure to incorporate the possibility of default, including that of banks, into the core of the analysis. With default assumed away, there can be no role for financ...
Article
Full-text available
Until recently, financial services regulation remained largely segmented along national lines. The integration of financial markets, however, calls for a systematic and coherent approach to regulation. This paper studies the effect of market based regulation on the proper functioning of the interbank market. Specifically, we argue that restrictions...
Article
Full-text available
We define continuous-time dynamics for exchange economies with fiat money. Traders have locally rational expectations, face a cash-in-advance constraint, and continuously adjust their short-run dominant strategy in a monetary strategic market game involving a double-auction with limit-price orders. Money has a positive value except on optimal rest-...
Chapter
Over the last couple of years the global financial system has undergone a period of unprecedented turmoil initiated by problems in the US mortgage market, which then spread to securitised products and a wide range of credit markets. Interbank markets have struggled to provide liquidity across the banking sector, thereby failing to act as a conduit...
Article
Full-text available
Until recently, financial services regulation remained largely segmented along national lines. The integration of financial markets, however, calls for a systematic and coherent approach to regulation. This paper studies the effect of market based regulation on the proper functioning of the interbank market. Specifically, we argue that restrictions...
Article
Full-text available
This paper introduces agent heterogeneity, liquidity, and endogenous default to a DSGE framework. Our model allows for a comprehensive assessment of regulatory and monetary policy, as well as welfare analysis in the different sectors of the economy. Due to liquidity and endogenous default, the transmission mechanism of shocks is well defined, and t...
Article
Full-text available
We analyze a market game where traders are heterogeneous with respect to their rationality level and have asymmetric information. The market mechanism results into a statistical equilibrium, where traders randomise among their available actions due to their limited rationality. We provide a necessary and sufficient condition for convergence of stat...
Article
Full-text available
This paper assesses the choice of policy instruments for crisis management and prevention and whether Central Banks should target consumer and asset prices to maintain financial stability. Our results suggest that the interest rate is preferable to the money supply instrument because in times of financial distress the Central Bank automatically sat...
Article
We show, in a monetary exchange economy, that asset prices in a complete markets general equilibrium are a function of the supply of liquidity by the Central Bank, through its effect on default and interest rates. Two agents trade goods and nominal assets to smooth consumption across periods and future states, in the presence of cash-in-advance fin...
Article
Full-text available
El objetivo de este documento es explorar la inestabilidad financiera, que en este caso obedece a una crisis inmobiliaria y mora de créditos hipotecarios. El modelo incorpora bancos y hogares heterogéneos. Las hipotecas están respaldadas por garantías, por un monto igual al valor del bien transado. La mora individual se traspasa a la economía vía m...
Article
I address the issue of the ‘number’ of international monetary equilibria that the international finance model of Geanakoplos and Tsomocos (2002) possesses. The mainstream competitive model has locally unique equilibria with respect to the real side of the economy; however, it manifests nominal indeterminacy. Kareken and Wallace [Kareken, J., Wallac...
Article
Full-text available
The introduction of Basel II has raised concerns about the potential impact of risk-sensitive capital requirements on the business cycle. Several approaches have been proposed to assess the procyclicality issue. In this paper, we adopt a general equilibrium model and conduct comprehensive analysis of different proposals. We set out a model that all...
Article
Full-text available
We show in an exchange economy with liquidity constraints that the volume of trade and asset prices depend on both the supply of liquidity by the Central Bank and on the liquidity of assets and commodities. As a result, monetary aggregates are informative for the assessment of economic developments and the conduct of monetary policy. We also show t...
Article
We develop a multi-period general equilibrium model of bank deposit, credit, and interim inter-bank loan markets in which banks initially specialize in their choices of debtors, leading to under-diversification, but nevertheless become entwined via inter-bank markets, leading to the fortunes of one bank affecting the profits and default rates of th...
Article
Full-text available
We develop a multi-period general equilibrium model of bank deposit, credit, and interim inter-bank loan markets in which banks initially specialize in their choices of debtors, leading to under-diversification, but nevertheless become entwined via inter-bank markets, leading to the fortunes of one bank affecting the profits and default rates of th...
Article
he article defines the framework to assess the financial stability as currently practised by central banks and international organizations. The author criticizes the comparison of the current methodology to the practices of central banks three or four decades ago. The article provides a brief introduction of original research defining the framework...
Article
Full-text available
The paper proposes a measure of financial fragility that is based on economic welfare in a general equilibrium model calibrated against UK data. The model comprises a household sector, three active heterogeneous banks, a central bank/regulator, incomplete markets, and endogenous default. We address the impact of monetary and regulatory policy, cred...
Article
Full-text available
We show, in an exchange economy with default, liquidity constraints and no aggregate uncertainty, that state prices in a complete markets general equilibrium are a function of the supply of liquidity by the Central Bank. Our model is derived along the lines of Dubey and Geanakoplos (1992). Two agents trade goods and nominal assets (Arrow-Debreu (AD...
Article
Full-text available
On the macro-economic policy side of Central Banking a remarkable consensus has been emerging over the last two decades. This covers both the applicable theoretical framework for analysing the transmission mechanism of monetary policy and also the appropriate institutional structure for the Central Bank to deploy its macro-economic policies. There...
Article
Full-text available
As financial stability has gained focus in economic policymaking, the demand for analyses of financial stability and the consequences of economic policy has increased. Alternative macroeconomic models are available for policy analyses, and this paper evaluates the usefulness of some models from the perspective of financial stability. Financial stab...
Article
Full-text available
This paper sets out a tractable model which illuminates problems relating to individual bank behaviour, to possible contagious inter-relationships between banks, and to the appropriate design of prudential requirements and incentives to limit ‘excessive’ risk-taking. Our model is rich enough to include heterogeneous agents, endogenous default, and...