DP12282 A Macroeconomic Model with Financially Constrained Producers and Intermediaries
|Author(s):||Vadim Elenev, Tim Landvoigt, Stijn van Nieuwerburgh|
|Publication Date:||September 2017|
|Keyword(s):||credit spread, Financial Intermediation, intermediary-based asset pricing, macroprudential policy|
|JEL(s):||F31, G12, G15|
|Programme Areas:||Financial Economics, Monetary Economics and Fluctuations|
|Link to this Page:||www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12282|
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.