Banking Crises & Contagion : Why Worry About Taxation, Output and the Cost of Capital?

The prediction and consequences of banking crises continue to be a fab in academic and political discussions. Researchers attempt to describe the link between these crises and the real economy. In this paper, we present an object oriented model that attempts to establish the relation of the real economy to banking crises and contagion. We describe a set of extensions to VBanking, an object oriented model which can be used to carry out simulations on the banking system of a hypothetical economy. We expand our existing work by proposing the way the model will link the banking system and the real economy, incorporating fiscal issues. We briefly present the empirical results of the current model and discuss the outcome from the proposed expansions. Our findings place some criticism on the ability of the regulatory measures of Basel III to prevent or handle banking crises. However, these measures do seem to contribute to a more stable path for the financial institutions and for the economy