Financial Intermediation, Leverage, and Macroeconomic Instability
نویسنده
چکیده
This paper investigates how financial-sector leverage affects macroeconomic instability and welfare. In the model, banks borrow (use leverage) to allocate resources to productive projects and provide liquidity. When banks do not actively issue new equity, aggregate outcomes depend on the level of equity in the financial sector. Equilibrium is inefficient because agents do not internalize how their decisions affect volatility, aggregate leverage, and the returns on assets. Leverage creates systemic risk, which increases the frequency and duration of crises. Limiting leverage decreases asset-price volatility and increases expected returns, which decrease the likelihood that the financial sector is undercapitalized. JEL: E44,G01,G20
منابع مشابه
Bank liabilities channel
The financial intermediation sector is important not only for channeling resources from agents in excess of funds to agents in need of funds (lending channel). By issuing liabilities it also creates financial assets held by other sectors of the economy for insurance purpose. When the intermediation sector creates less liabilities or the value of outstanding liabilities falls, agents are less wi...
متن کاملWorking Paper No. 157 THE FINANCIAL LEVERAGE COEFFICIENT: Macroeconomic Implications of Government Involvement in Intermediation by
Disclaimer: The opinions presented in the paper are those of the authors and not necessarily of the organisation to which they are affiliated.
متن کاملFinancial Intermediation and Macroeconomic Analysis
I ssues relating to fi nancial stability have always been part of the macroeconomics curriculum, but they have often been presented as mainly of historical interest, or primarily of relevance to emerging markets. However, the recent fi nancial crisis has made it plain that even in economies like the United States, signifi cant disruptions of fi nancial intermediation remain a possibility. Under...
متن کاملCosts of financial instability, household-sector balance sheets and consumption
The literature on costs of financial instability tends to focus on fiscal costs and the impact on GDP of banking crises. In this paper we analyse the effect of a banking or currency crisis on consumption. We show that consumption plays an important role in the macroeconomic adjustment following a financial crisis. Furthermore, the effect of a crisis is aggravated by high leverage, notably as sh...
متن کاملFiscal deficits, financial fragility, and the effectiveness of government policies ¬リニ
Recent macro developments in the euro area have highlighted the interactions between fiscal policy, sovereign debt, and financial fragility. We take a structural macroeconomic model with frictions in the financial intermediation process, in line with recent research, but introduce asset choice and sovereign debt holdings in the portfolio of banks. Using this model, we emphasize a new crowding-o...
متن کامل