Financial crises, limited-asset market participation, and banks’ balance-sheet constraints

Our chapter contributes to the literature on financial crises by jointly considering the banks' balance sheet constraints with the limited--asset market participation (LAMP) assumption in an otherwise simple medium--scale New Keynesian economy. The assumption of limited participation in the asset markets and its implications for policies are investigated in, e.g., Galì et al. (2007), Di Bartolomeo and Rossi (2007a, 2007b), Bilbiie (2008), Colciago (2011), Motta and Tirelli (2012, 2015), and Albonico et al. (2015). In other words, our key question is if the assumption that only a fraction of the households can access the credit market by financial intermediaries worsens the negative effects of banks' balance sheet constraints on credit or not. As the behavior of liquidity constrained agents crucially depends on their capacity of suppling labor (e.g., Colciago, 2011), we also fully model labor market imperfections. We assume the existence of differentiated workers organized in unions that are allowed to set their wage facing nominal rigidities.