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Title: A Macroeconomic Model with Financially Constrained Producers and Intermediaries

Author(s): Vadim Elenev, Tim Landvoigt and Stijn van Nieuwerburgh

Publication Date: September 2017

Keyword(s): credit spread, Financial Intermediation, intermediary-based asset pricing and macroprudential policy

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

Abstract: We propose a model that can simultaneously capture the sharp and persistent drop in macro-economic aggregates and the sharp change in credit spreads observed in the U.S. during the Great Recession. The model features financial intermediaries that make long-term defaultable loans to producers and raise short-term debt from savers. Intermediaries are subject to a regulatory equity capital constraint. Policies limiting intermediary leverage redistribute wealth from savers to equity owners of producers and intermediaries. The benefits of lower intermediary leverage for financial stability are offset by the costs from lower output. Current capital requirements are close to optimal.

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Bibliographic Reference

Elenev, V, Landvoigt, T and van Nieuwerburgh, S. 2017. 'A Macroeconomic Model with Financially Constrained Producers and Intermediaries'. London, Centre for Economic Policy Research. http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12282