Relative price changes and absolute banking disasters: The role of equilibrium asset price adjustments

Collapsing asset values frequently coincide with wider solvency crises, leaving financial institutions in the position of seizing and liquidating collateral at precisely the moment when the market value is lowest. This paper develops a dynamic general equilibrium model to explore the steady state and dynamic consequences of real exchange rate shocks for equilibrium domestic sectoral asset values-and by extension for domestic banks. The model is applied retroactively to the Chilean financial collapse of 1983.