Costly Financial Intermediation and Excess Consumption Volatility

Ayse Sapci

No 2014-04, Working Papers from Department of Economics, Colgate University

Abstract: This paper documents the cyclical properties of financial intermediation costs and uses their dynamics to explain excess consumption volatility differences across countries in a dynamic stochastic general equilibrium (DSGE) framework. I find that financial development levels have no role in explaining excess consumption volatilities. Instead, the volatility of the financial sector plays the determinative role. The model matches the data, finding excess consumption volatility to be four times higher in an average emerging country compared to the US. This paper also shows that if the US had the same intermediation cost structure as the average emerging country, deteriorations in the production, consumption, labor market, business investment, and real estate market following a financial shock would increase sixfold, on average.

Keywords: Financial intermediation costs; Excess consumption volatility; Housing market; Financial development; Financial shocks (search for similar items in EconPapers)
JEL-codes: E21 E32 E44 G01 G21 O16 (search for similar items in EconPapers)
Date: 2014-04-01, Revised 2014-06-11
New Economics Papers: this item is included in nep-dge and nep-mac
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Journal Article: Costly financial intermediation and excess consumption volatility (2017)
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