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Working paper

The Effects of Robo-Signing on the Economy and Unconventional Monetary Policy

Malkov E.
As Akerlof and Shiller (2009) argue, corruption and bad faith played an important role in determining the severity of each of the past recessions in the US. This paper studies the impact of robo-signing, which is a typical example of economic bad faith, on the economy and unconventional monetary policy during the last financial crisis. We modify DSGE model by Gertler and Karadi (2011) by including the features of robo-signing. The paper concludes that banks’ bad faith magnifies the financial crisis through the transmission channel related to changes of leverage of financial intermediaries and induces the central bank to conduct more aggressive unconventional monetary policy. We constitute the theoretical framework for studying the cases of economic bad faith during the last financial crisis and provide the model that well fits the actual data.