DP11907 Financial Cycles with Heterogeneous Intermediaries
Author(s): | Nuno Coimbra, Hélène Rey |
Publication Date: | March 2017 |
Date Revised: | December 2021 |
Keyword(s): | banks, cycle, leverage, risk-shifting, systemic risk |
JEL(s): | E44, E58, G21 |
Programme Areas: | Financial Economics, Monetary Economics and Fluctuations |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=11907 |
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.