Financial Frictions: Macro vs Micro Volatility

Ralph Luetticke, Seungcheol Lee and Morten Ravn

No 15133, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: Business cycles; Financial frictions; Incomplete markets; Macroprudential policy; Monetary policy (search for similar items in EconPapers)
JEL-codes: C11 D31 E32 E63 (search for similar items in EconPapers)
Date: 2020-08
New Economics Papers: this item is included in nep-ban, nep-cwa, nep-dge, nep-fdg and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Financial frictions: micro vs macro volatility (2021)
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