The expectational stability (E-stability) property of rational expectations equilibria (REE) in linear macroeconomic dynamic stochastic general equilibrium (DSGE) models is known to be sensitive to the information available to decision makers as well as the structure of the economic environment considered. Models featuring news shocks as a source of macroeconomic fluctuations depart from traditional assumptions regarding both the structure of the economy and the information set of agents. This paper investigates whether E-stability of REE is affected by either the inclusion of news shocks by themselves or the complementary structural changes. The main results find that the E-stability property of REE is robust to the inclusion (or exclusion) of news shocks and that well-known news-shock DSGE models permit REE which are simultaneously E-stable and capable of producing qualitatively realistic expectationally driven business cycles.

The paper discusses the effects on growth of a systemic banking crisis as a result of debt defaults. These effects will come from the impact of credit rationing on consumption and credit and from the impacts of a significant rise in the spread between lending and borrowing rates for both producers and consumers. The analysis uses the dynamic stochastic general equilibrium version of the National Institute global model. The paper also investigates the impact on output of a permanent, regulation induced, rise in margins in the financial sector, taking into account the impacts of regulation on equity market valuations.