The Effects Of Robo-Signing On The Economy And Unconventional Monetary Policy

As Akerlof and Shiller (2009) argue, corruption and bad faith played an important role in determining the severity of the recent 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 the 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 in the leverage of financial intermediaries and induces the central bank to conduct a more aggressive unconventional monetary policy. We suggest a theoretical framework for studying cases of economic bad faith during the last financial crisis, and provide a model that well fits the data.