We develop a tractable macro-finance model in which entrepreneurs cannot pool idiosyncratic risks across firms due to restricted market participation. Costly risk pooling is provided by financial intermediaries who also issue safe assets via balance sheet leverage. We characterize the general equilibrium effects that associate intermediation costs to the dynamics of output and show that higher (lower) cost efficiency fosters (weakens) growth but also amplifies (dampens) its fluctuations. The model predicts negative relationships between the financial sector’s costs-to-assets and leverage ratios and the business cycle, which we find to hold for the US economy.

Risk pooling, intermediation efficiency, and the business cycle

Dindo P.;Modena A.
;
Pelizzon L.
In corso di stampa

Abstract

We develop a tractable macro-finance model in which entrepreneurs cannot pool idiosyncratic risks across firms due to restricted market participation. Costly risk pooling is provided by financial intermediaries who also issue safe assets via balance sheet leverage. We characterize the general equilibrium effects that associate intermediation costs to the dynamics of output and show that higher (lower) cost efficiency fosters (weakens) growth but also amplifies (dampens) its fluctuations. The model predicts negative relationships between the financial sector’s costs-to-assets and leverage ratios and the business cycle, which we find to hold for the US economy.
File in questo prodotto:
File Dimensione Formato  
dmp_jedc_preprint.pdf

embargo fino al 01/08/2024

Tipologia: Documento in Post-print
Licenza: Accesso gratuito (solo visione)
Dimensione 1.71 MB
Formato Adobe PDF
1.71 MB Adobe PDF   Visualizza/Apri

I documenti in ARCA sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/10278/5001992
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 0
  • ???jsp.display-item.citation.isi??? ND
social impact