Financial Cycles with Heterogeneous Intermediaries

Nuno Coimbra and Helene Rey

The Review of Economic Studies, 2024, vol. 91, issue 2, 817-857

Abstract: We develop a dynamic macroeconomic model with heterogeneous financial intermediaries and endogenous entry. Time-varying endogenous macroeconomic risk arises from the risk-shifting behaviour of the cross-section of financial intermediaries. When interest rates are high, a decrease in interest rates stimulates investment and decreases aggregate risk. In contrast, when they are low, further stimulus can increase financial instability while inducing a fall in the risk premium. In this case, there is a trade-off between stimulating the economy and financial stability. This provides a model of the risk-taking channel of monetary policy.

Keywords: Financial cycle; Risk-taking channel of monetary policy; Leverage; Systemic risk (search for similar items in EconPapers)
Date: 2024
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Related works:
Working Paper: Financial Cycles with Heterogeneous Intermediaries (2017)
Working Paper: Financial Cycles with Heterogeneous Intermediaries (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:91:y:2024:i:2:p:817-857.

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