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A macroeconomic model with heterogeneous and financially-constrained intermediaries

Thomas Lejeune () and Raf Wouters ()

No 367, Working Paper Research from National Bank of Belgium

Abstract: This paper analyses the risk amplification inherent in a macroeconomic model with a heterogeneous financial sector. It extends a model with an equity-constrained intermediary by adding a shadow banking intermediary with pro-cyclical leverage. It is shown that the inclusion of this intermediary significantly amplifies financial frictions and adds to financial instability. Quantitative effects on asset prices are magnified, and the amplification propagates to the real side of the macroeconomy. Reducing the size of the shadow banking sector involves a trade-off between stabilizing the economy and the expected growth of economic activity. Ignoring the heterogeneity of the financial sector may lead to an underestimation of the excess risk-taking due to the anticipation of expansionary policies and of financial and macroeconomic responses to shocks.

Keywords: Financial frictions; Financial constraints; Endogenous risk; Shadow banking (search for similar items in EconPapers)
JEL-codes: G2 G12 E44 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2019-02
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:201902-367

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