Risk Pooling, Leverage, and the Business Cycle

Pietro Dindo, Andrea Modena and Loriana Pelizzon ()

No 7772, CESifo Working Paper Series from CESifo

Abstract: This paper studies the impact of financial sector size and leverage on the business cycle and risk-free rates dynamics. We develop a general equilibrium model of a productive economy where financial intermediaries provide costly risk mitigation to households by pooling the idiosyncratic risks of their investment activities. In contrast to previous studies, we show that intermediaries not only amplify the variations of relative wealth between sectors, but may also mitigate business cycle fluctuations, while providing households with a risk-free asset whose real return is pro-cyclical and possibly negative. Households benefit the most when the financial sector is neither too small, thus avoiding high consumption fluctuations and costly risk mitigation, nor too big, so that fewer resources are lost after intermediation costs.

Keywords: business cycle; frictions; leverage; mitigation; risk pooling (search for similar items in EconPapers)
JEL-codes: E13 E32 E69 G12 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Risk pooling, leverage, and the business cycle (2020)
Working Paper: Risk Pooling, Leverage, and the Business Cycle (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_7772

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