Risky lending, bank leverage and unconventional monetary policy

Francesco Ferrante

Journal of Monetary Economics, 2019, vol. 101, issue C, 100-127

Abstract: A standard New Keynesian model is extended to include a rich financial system in which financially constrained banks lend to firms and homeowners via defaultable long-term loans. The model generates two endogenous components of interest rate spreads on mortgages and corporate loans: i) a default premium and ii) a liquidity premium. Financial shocks affecting these premiums can reproduce the behavior of several macroeconomic variables during the Great Recession, when we take into account the impact of the zero-lower-bound. The model is also used to quantify the effect of the Federal Reserve’s purchases of mortgage-backed securities during the last recession.

Keywords: Financial frictions; Banking; Mortgages; Unconventional monetary policy; Zero lower bound (search for similar items in EconPapers)
JEL-codes: E32 E44 E58 G21 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:101:y:2019:i:c:p:100-127

DOI: 10.1016/j.jmoneco.2018.07.014

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