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Discussion Paper Details

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Title: Financial Cycles with Heterogeneous Intermediaries

Author(s): Nuno Coimbra and Hélène Rey

Publication Date: March 2017

Keyword(s): banks, cycle, leverage, risk-shifting and systemic risk

Programme Area(s): Financial Economics and Monetary Economics and Fluctuations

Abstract: This paper develops a dynamic macroeconomic model with heterogeneous financial intermediaries and endogenous entry. It features time-varying endogenous macroeconomic risk that arises from the risk-shifting behaviour of financial intermediaries combined with entry and exit. We show that when interest rates are high, a decrease in interest rates stimulates investment and increases financial stability. In contrast, when interest rates are low, further stimulus can increase systemic risk and induce a fall in the risk premium through increased risk-shifting. In this case, the monetary authority faces a trade-off between stimulating the economy and financial stability.

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Bibliographic Reference

Coimbra, N and Rey, H. 2017. 'Financial Cycles with Heterogeneous Intermediaries'. London, Centre for Economic Policy Research. http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11907