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.