Banks’ leverage behaviour in a two-agent New Keynesian model

Andrea Boitani and Chiara Punzo

No def063, DISCE - Working Papers del Dipartimento di Economia e Finanza from Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE)

Abstract: In a NK model with two types of rational agents, savers and capitalists, and non- maximizing banks, nancial shocks do a¤ect the macroeconomic dynamics depending on banksbehaviour as for their leverage ratio. We rst show that the level of banks leverage - which may be imposed by banks regulation - a¤ects the steady state level of output, employment and consumption, as might be expected in a non-Modigliani- Miller world. Di¤erent banks behaviour after a shock has widely di¤erent e¤ects on the macroeconomic dynamics: passive leverage results to be shock absorbing and capable of neutralizing an initial nancial shock, whilst procyclical behaviour implies higher and more persistent instability and distributive e¤ects than the constant lever- age behaviour. Finally, we show that the interaction of procyclical leverage with hysteresis in output and employment stregthens the persistence of nancial shocks.

Keywords: Leverage, Procyclicality; Two-agent model; Non-maximising banks. (search for similar items in EconPapers)
JEL-codes: E32 E44 E70 G01 (search for similar items in EconPapers)
Pages: 23
Date: 2018-01
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Banks’ leverage behaviour in a two-agent new Keynesian model (2019)
Working Paper: Banks’ leverage behaviour in a two-agent New Keynesian model (2018)
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