Financial Cycles with Heterogeneous Intermediaries

Helene Rey and ,

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; Systemic risk; Cycle; Leverage; Risk-shifting (search for similar items in EconPapers)
JEL-codes: E44 E58 G21 (search for similar items in EconPapers)
Date: 2017-03
New Economics Papers: this item is included in nep-ban, nep-dge, nep-fdg, nep-mac and nep-upt
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Citations: View citations in EconPapers (64)

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Related works:
Journal Article: Financial Cycles with Heterogeneous Intermediaries (2024)
Working Paper: Financial Cycles with Heterogeneous Intermediaries (2017)
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