Financial cycles with heterogeneous intermediaries

Coimbra, N and Rey, H (2024) Financial cycles with heterogeneous intermediaries. Review of Economic Studies, 91 (2). pp. 817-857. ISSN 0034-6527 OPEN ACCESS

Abstract

We develop a dynamic macroeconomic model with heterogeneous financial intermediaries and endogenous entry. Time-varying endogenous macroeconomic risk arises from the risk-shifting behaviour of the cross-section of financial intermediaries. When interest rates are high, a decrease in interest rates stimulates investment and decreases aggregate risk. In contrast, when they are low, further stimulus can increase financial instability while inducing a fall in the risk premium. In this case, there is a trade-off between stimulating the economy and financial stability. This provides a model of the risk-taking channel of monetary policy.

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Item Type: Article
Subject Areas: Economics
Additional Information:

This is a pre-copyedited, author-produced version of an article accepted for publication in The Review of Economic Studies following peer review. The version of record is available online at: 10.1093/restud/rdad039

Funder Name: European Research Council
Date Deposited: 17 Apr 2023 10:27
Date of first compliant deposit: 10 Oct 2022
Subjects: Financial risk
Business cycles
Monetary economics
Last Modified: 27 May 2024 01:17
URI: https://lbsresearch.london.edu/id/eprint/2661
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