Financial intermediaries, leverage ratios, and business cycles

Yasin Mimir

MPRA Paper from University Library of Munich, Germany

Abstract: I document cyclical properties of aggregate measures of liabilities, equity, and leverage ratio in the U.S. financial sector and those of credit spread. I find that (i) liabilities and equity are procyclical, leverage ratio is acyclical, and credit spread is countercyclical, (ii) financial variables are three to ten times more volatile than output, and (iii) financial variables lead the business cycle. I present a dynamic stochastic general equilibrium model with profit maximizing banks where bank equity mitigates a moral hazard problem between banks and their depositors. The driving sources of business cycles are shocks to bank equity as well as standard productivity shocks. The model generates real and financial fluctuations consistent with the U.S. data. The model also delivers some policy prescriptions about capital adequacy requirements of banks.

Keywords: Banks; Financial Fluctuations; Credit Frictions; Bank Equity; Real Fluctuations (search for similar items in EconPapers)
JEL-codes: E10 E20 E32 E44 (search for similar items in EconPapers)
Date: 2010-09-01
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cba, nep-dge, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Financial Intermediaries, Leverage Ratios and Business Cycles (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:27643

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