Financial Cycles with Heterogeneous Intermediaries

Abstract We develop a dynamic macroeconomic model with heterogeneous financial intermediaries and endogenous entry. Time-varying risk arises from the risk-shifting behaviour of cross-section intermediaries. When interest rates are high, decrease in stimulates investment decreases aggregate risk. In contrast, when they low, further stimulus can increase instability while inducing fall premium. this case, there is trade-off between stimulating economy stability. This provides risk-taking channel monetary policy.