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Credit risk transfers and the macroeconomy

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  • Faia, Ester

Abstract

The recent financial crisis has highlighted the limits of the "originate to distribute" model of banking, but its nexus with the macroeconomy and monetary policy remains unexplored. I build a DSGE model with banks (along the lines of Holmström and Tirole [28] and Parlour and Plantin [39]) and examine its properties with and without active secondary markets for credit risk transfer. The possibility of transferring credit reduces the impact of liquidity shocks on bank balance sheets, but also reduces the bank incentive to monitor. As a result, secondary markets allow to release bank capital and exacerbate the effect of productivity and other macroeconomic shocks on output and inflation. By offering a possibility of capital recycling and by reducing bank monitoring, secondary credit markets in general equilibrium allow banks to take on more risk. JEL Classification: E3, E5, G3

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Paper provided by European Central Bank in its series Working Paper Series with number 1256.

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Date of creation: Oct 2010
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Handle: RePEc:ecb:ecbwps:20101256

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Keywords: credit risk transfer; dual moral hazard; liquidity; monetary policy; Welfare;

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  1. Dell''Ariccia, Giovanni & Igan, Deniz & Laeven, Luc, 2008. "Credit Booms and Lending Standards: Evidence From The Subprime Mortgage Market," CEPR Discussion Papers 6683, C.E.P.R. Discussion Papers.
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  12. Ignazio Angeloni & Ester Faia, 2009. "A Tale of Two Policies: Prudential Regulation and Monetary Policy with Fragile Banks," Kiel Working Papers 1569, Kiel Institute for the World Economy.
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Cited by:
  1. repec:hal:cesptp:halshs-00613188 is not listed on IDEAS
  2. repec:hal:psewpa:halshs-00744047 is not listed on IDEAS
  3. Radde, Sören, 2012. "Liquidity Crises, Banking, and the Great Recession," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 65408, Verein für Socialpolitik / German Economic Association.
  4. Eleni Iliopulos & Thepthida Sopraseuth, 2012. "L'intermédiation financière dans l'analyse macroéconomique : Le défi de la crise," Working Papers halshs-00744047, HAL.
  5. Sören Radde, 2012. "Flight-to-Liquidity and the Great Recession," Discussion Papers of DIW Berlin 1242, DIW Berlin, German Institute for Economic Research.

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