Financial frictions: micro vs macro volatility

Seungcheol Lee, Ralph Luetticke and Morten Ravn

No 2622, Working Paper Series from European Central Bank

Abstract: We introduce frictional financial intermediation into a HANK model. Households are subject to idiosyncratic and aggregate risk and smooth consumption through savings and consumer loans intermediated by banks. The banking friction introduces an endogenous countercyclical spread between the interest rate on savings and on loans. This interacts with incomplete markets because borrowers and savers face different intertemporal prices, and induces a time-varying mass point of high MPC households. Aggregate shocks through their impact on the spread give rise to consumption inequality. We show this mechanism to be empirically relevant. Ex-ante macro prudential regulation reduces welfare by reducing consumption smoothing. JEL Classification: C11, D31, E32, E63

Keywords: business cycles; incomplete markets; macroprudential regulation; monetary policy; financial frictions (search for similar items in EconPapers)
Date: 2021-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cwa, nep-dge, nep-fdg and nep-mac
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Financial Frictions: Macro vs Micro Volatility (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20212622

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