Foreseen Risks

João Gomes (), Marco Grotteria and Jessica Wachter ()

No 25277, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Large crises tend to follow rapid credit expansions. Causality, however, is far from obvious. We show how this pattern arises naturally when financial intermediaries optimally exploit economic rents that drive their franchise value. As this franchise value fluctuates over the business cycle, so too do the incentives to engage in risky lending. The model leads to novel insights on the effects of unconventional monetary policies in developed economies. We argue that bank lending might have responded less than expected to these interventions because they enhanced franchise value, inadvertently encouraging banks to pursue safer investments in low-risk government securities.

JEL-codes: G01 G18 G21 G32 (search for similar items in EconPapers)
Date: 2018-11
New Economics Papers: this item is included in nep-ban and nep-rmg
Note: AP CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published as João F. Gomes & Marco Grotteria & Jessica A. Wachter, 2023. "Foreseen Risks," Journal of Economic Theory, .

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