A Macroeconomic Model with Financially Constrained Producers and Intermediaries

Tim Landvoigt, Stijn Van Nieuwerburgh and Vadim Elenev
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Tim Landvoigt: University of Texas at Austin

No 1224, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We solve a general equilibrium model with three types of agents and a government. Borrower-entrepreneurs produce output financed with long-term debt issued by financial intermediaries, subject to a leverage constraint. Intermediaries fund these loans combining deposits and their own equity, and are subject to a regulatory capital constraint. Savers provide funding to banks and to the government. Both entrepreneurs and banks make optimal default decisions. The government issues debt to finance budget deficits and to pay for bank rescue operations. We solve for macroeconomic quantities, the price of capital, the yield on safe bonds, and the credit spread. We study how financial and non-financial recessions differ, show that high credit spread forecasts future declines in economic activity, and study macro-prudential policies. Policies that limit corporate leverage and financial leverage reduce welfare. Their benefits for financial and macro-economic stability are outweighed by the costs from a smaller-sized economy. The two types of macroprudential policies have different implications for the wealth distribution.

Date: 2016
New Economics Papers: this item is included in nep-ban and nep-mac
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Citations: View citations in EconPapers (27)

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Related works:
Journal Article: A Macroeconomic Model With Financially Constrained Producers and Intermediaries (2021)
Working Paper: A Macroeconomic Model with Financially Constrained Producers and Intermediaries (2018)
Working Paper: A Macroeconomic Model with Financially Constrained Producers and Intermediaries (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:1224

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