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

Andrea Boitani and Chiara Punzo

No 150, DEM Working Papers Series from University of Pavia, Department of Economics and Management

Abstract: In a NK model with two types of rational agents,savers and capitalists, and non-maximizing banks, fi?nancial shocks do affect the macroeconomic dynamics depending on banks ?behaviour as for their leverage ratio. We fi?rst show that the level of banks' leverage - which may be imposed by banks regulation - affects the steady state level of output, employment and consumption, as might be expected in a non-Modigliani-Miller world. Different banks? behaviour after a shock has widely different effects on the macroeconomic dynamics:passive leverage results to be shock absorbing and capable of neutralizing an initial fi?nancial shock,whilst procyclical behaviour implies higher and more persistent instability and distributive effects than the constant leverage behaviour. Finally, we show that the interaction of procyclical leverage with hysteres is in output and employment stregthens the persistence of fi?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: 24 pages
Date: 2018-01
New Economics Papers: this item is included in nep-ban and nep-mac
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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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