Leverage away your wedge: An analysis of banks' impact on output

Enoch Hill and David Perez-Reyna

No 14586, Documentos CEDE from Universidad de los Andes, Facultad de Economía, CEDE

Abstract: In this paper we present a general equilibrium model where heterogeneous agents endogenously choose whether to become workers, consumers or entrepreneurs in order to analyze how limits on the leverage of banks affect real output. In our model tighter limits on the leverage of banks cause an increase in the spread between the interest rate that banks charge for loans and the interest rate that banks pay for deposits. A higher spread results in two types of distortions: First, firms with the same productivity will have different size. Second, productive firms will cease to exist, while nonproductive ones will enter. These distortions result in lower production.

Keywords: Banking leverage; misallocation (search for similar items in EconPapers)
JEL-codes: E44 G21 G28 (search for similar items in EconPapers)
Pages: 37
Date: 2016-05-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:col:000089:014586

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