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Financial Cycles with Heterogeneous Intermediaries

Nuno Coimbra and Helene Rey ()

No 11907, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper develops a dynamic macroeconomic model with heterogeneous financial intermediaries and endogenous entry. It features time-varying endogenous macroeconomic risk that arises from the risk-shifting behaviour of financial intermediaries combined with entry and exit. We show that when interest rates are high, a decrease in interest rates stimulates investment and increases financial stability. In contrast, when interest rates are low, further stimulus can increase systemic risk and induce a fall in the risk premium through increased risk-shifting. In this case, the monetary authority faces a trade-off between stimulating the economy and financial stability.

Keywords: banks; cycle; leverage; risk-shifting; systemic risk (search for similar items in EconPapers)
JEL-codes: E44 E58 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-dge, nep-fdg, nep-mac and nep-upt
Date: 2017-03
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