Research published by the Bank for International Settlements outlines a mechanism for how a surge and collapse in credit supply can “significantly amplify” a financial crisis.

In the working paper, Yavuz Arslan, Bulent Guler and Burhan Kuruscu develop a heterogeneous-agent, overlapping-generations model, in which households face idiosyncratic income risk. The model also contains banks, which lend at short and long maturities, and firms that finance part of their wage bill through short-term