Endogenous risk in a DSGE model with capital-constrained financial intermediaries

Hans Dewachter and Raf Wouters

No 235, Working Paper Research from National Bank of Belgium

Abstract: This paper proposes a perturbation-based approach to implement the idea of endogenous financial risk in a standard DSGE macro-model. Recent papers, such as Mendoza (2010), Brunnermeier and Sannikov (2012) and He and Krishnamurthy (2012), that have stimulated the research field on endogenous risk in a macroeconomic context, are based on sophisticated solution methods that are not easily applicable in larger models. We propose an approximation method that allows us to capture some of the basic insights of this literature in a standard macro-model. We are able to identify an important risk-channel that derives from the risk aversion of constrained intermediaries and that contributes significantly to the overall financial and macro volatility. With this procedure, we obtain a consistent and computationally-efficient modelling device that can be used for integrating financial stability concerns within the traditional monetary policy analysis.

Pages: 63 pages
Date: 2012-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
https://www.nbb.be/doc/ts/publications/wp/wp235en.pdf (application/pdf)

Related works:
Journal Article: Endogenous risk in a DSGE model with capital-constrained financial intermediaries (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:201210-235

Access Statistics for this paper

More papers in Working Paper Research from National Bank of Belgium Contact information at EDIRC.
Bibliographic data for series maintained by ().