Year: 2017
Type: article
Abstract: We propose a general equilibrium framework with financial intermediaries subject to endogenous leverage constraints, and assess its ability to explain the observed fluctuations in intermediary leverage and real economic activity. In the model, intermediaries (“banks”) borrow in the form of short-term risky debt. The presence of risk-shifting moral hazard gives rise to a leverage constraint, and creates a link between the volatility in bank asset returns and leverage. Unlike TFP or capital quality shocks, volatility shocks produce empirically plausible fluctuations in bank leverage. The model replicates well the fall in leverage, assets, and GDP during the 2007–2009 financial crisis. (JEL D82, E44, G01, G21, G32)
DOI: 10.1257/mac.20140084
Authors: Galo Nuño, Carlos Thomas
Institution: Bank of Spain
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3121689787