Risk pooling, intermediation efficiency, and the business cycle

Pietro Dindo, Andrea Modena and Loriana Pelizzon ()

Journal of Economic Dynamics and Control, 2022, vol. 144, issue C

Abstract: We develop a tractable macro-finance model in which entrepreneurs cannot pool idiosyncratic risks across firms due to restricted market participation. Costly risk pooling is provided by financial intermediaries who also issue safe assets via balance sheet leverage. We characterize the general equilibrium effects that associate intermediation costs with the dynamics of output and show that higher (lower) cost efficiency fosters (weakens) growth but also amplifies (dampens) its fluctuations. The model predicts negative relationships between the financial sector’s costs-to-assets and leverage ratios and the business cycle, which we find to hold for the US economy.

Keywords: Amplification; Business cycle; Efficiency; Dampening; Restricted market participation; Risk pooling (search for similar items in EconPapers)
JEL-codes: E13 E32 E69 G12 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:144:y:2022:i:c:s0165188922002044

DOI: 10.1016/j.jedc.2022.104500

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