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Financial Intermediation, Capital Accumulation and Crisis Recovery

Hans Gersbach (), Jean-Charles Rochet and Martin Scheffel ()

No 881, IDEI Working Papers from Institut d'Économie Industrielle (IDEI), Toulouse

Abstract: This paper integrates banks into a two-sector neoclassical growth model to account for the fact that a fraction of firms relies on banks to finance their investments. There are four major contributions to the literature: First, although banks’ leverage amplifies shocks, the endogenous response of leverage to shocks is an automatic stabilizer that improves the resilience of the economy. In particular, financial and labor market institutions are essential factors that determine the strength of this automatic stabilization. Second, there is a mix of publicly financed bank re-capitalization, dividend payout restrictions, and consumption taxes that stimulates a Pareto-improving rapid build-up of bank equity and accelerates economic recovery after a slump in the banking sector. Third, the model replicates typical patterns of financing over the business cycle: procyclical bank leverage, procyclical bank lending, and countercyclical bond financing. Fourth, the framework preserves its analytical tractability wherefore it can serve as a macro-banking module that can be easily integrated into more complex economic environments.

Keywords: Financial intermediation; capital accumulation; banking crisis; macroeconomic shocks; business cycles; bust-boom cycles; managing recoveries (search for similar items in EconPapers)
JEL-codes: E21 E32 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-dge, nep-fdg and nep-mac
Date: 2018-01
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Working Paper: Financial Intermediation, Capital Accumulation and Crisis Recovery (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:ide:wpaper:32398

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