Financial cycles with heterogeneous intermediaries

Subject

Economics

Publishing details

NBER Working Paper

Authors / Editors

Coimbra N; Rey H

Biographies

Publication Year

2017

Abstract

This paper develops a dynamic macroeconomic model with heterogeneous financial intermediaries and endogenous entry. It features time-varying endogenous macroeconomic risk that arises from the risk-shifting behaviour of financial intermediaries combined with entry and exit. We show that when interest rates are high, a decrease in interest rates stimulates investment and increases financial stability. In contrast, when interest rates are low, further stimulus can increase systemic risk and induce a fall in the risk premium through increased risk-shifting. In this case, the monetary authority faces a trade-off between stimulating the economy and financial stability

Series Number

23245

Series

NBER Working Paper