Financial Cycles with Heterogeneous Intermediaries*
Review of Economic Studies, 2023 April [Open Access https://academic.oup.com/restud/advance-article/doi/10.1093/restud/rdad039/7116652]
Coimbra, N., Rey, H.
Date Published: 13/04/2023
Nuno Coimbra , Hélène Rey, Financial Cycles with Heterogeneous Intermediaries, The Review of Economic Studies, 2023
Abstract:
We develop a dynamic macroeconomic model with heterogeneous financial intermediaries and endogenous entry. Time-varying endogenous macroeconomic risk arises from the risk-shifting behaviour of the cross-section of financial intermediaries. When interest rates are high, a decrease in interest rates stimulates investment and decreases aggregate risk. In contrast, when they are low, further stimulus can increase financial instability while inducing a fall in the risk premium. In this case, there is a trade-off between stimulating the economy and financial stability. This provides a model of the risk-taking channel of monetary policy.
Citation:
Nuno Coimbra , Hélène Rey, Financial Cycles with Heterogeneous Intermediaries, The Review of Economic Studies, 2023, rdad039, https://doi.org/10.1093/restud/rdad039
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*ERC Advanced Grant 695722