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