Discussion paper

DP11907 Financial Cycles with Heterogeneous Intermediaries

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.


Coimbra, N and H Rey (2017), ‘DP11907 Financial Cycles with Heterogeneous Intermediaries‘, CEPR Discussion Paper No. 11907. CEPR Press, Paris & London. https://cepr.org/publications/dp11907