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Financial Cycles with Heterogeneous Intermediaries

Author

Listed:
  • Nuno Coimbra
  • Hélène Rey

Abstract

We develop a dynamic macroeconomic model with heterogeneous financial intermediaries and endogenous entry. Time-varying endogenous macroeconomic risk arises from the risk-shifting behaviour of the cross-section of financial intermediaries. When interest rates are high, a decrease in interest rates stimulates investment and decreases aggregate risk. In contrast, when they are low, further stimulus can increase financial instability while inducing a fall in the risk premium. In this case, there is a trade-off between stimulating the economy and financial stability. This provides a model of the risk-taking channel of monetary policy.

Suggested Citation

  • Nuno Coimbra & Hélène Rey, 2024. "Financial Cycles with Heterogeneous Intermediaries," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(2), pages 817-857.
    • Handle: RePEc:oup:restud:v:91:y:2024:i:2:p:817-857.
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    File URL: http://hdl.handle.net/10.1093/restud/rdad039
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