Risk Pooling, Leverage, and the Business Cycle

Leverage Restrictions in a Business Cycle Model

We modify an otherwise standard medium-sized DSGE model, in order to study the macroeconomic e§ects of placing leverage restrictions on financial intermediaries. The financial intermediaries (‘bankers’) in the model must exert e§ort in order to earn high returns for their creditors. An agency problem arises because banker e§ort is not observable to creditors. The consequence of this agency prob...

Firm Risk and Leverage-Based Business Cycles

I characterize cyclical fluctuations in the cross-sectional dispersion of firm-level productivity. Using the micro-estimated dispersion, or “risk,” stochastic process as an input to a baseline DSGE financial accelerator model, I assess how well the model reproduces cyclical movements in both real and financial conditions of the economy. In the model, risk shocks calibrated to micro data lead to...

Reviewing the Leverage Cycle

We review the theory of leverage developed in collateral equilibrium models with incomplete markets. We explain how leverage tends to boost asset prices, and create bubbles. We show how leverage can be endogenously determined in equilibrium, and how it depends on volatility. We describe the dynamic feedback properties of leverage, volatility, and asset prices, in what we call the Leverage Cycle...

Entrepreneurial Activity, Risk and the Business Cycle∗

This paper analyzes a model in which the risk associated with entrepreneurial activity implies that the amount of such activity is procyclical and results in both amplification and intertemporal propagation of productivity shocks. In the model risk averse agents choose between a riskless project and a risky project with higher expected return (‘the entrepreneurial activity’). Agents who choose ...

Business Cycle Features In The Iranian Economy