Credit risk transfers and the macroeconomy
AbstractThe 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  and Parlour and Plantin ) 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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Bibliographic InfoPaper provided by European Central Bank in its series Working Paper Series with number 1256.
Length: 45 pages
Date of creation: Oct 2010
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Other versions of this item:
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- G3 - Financial Economics - - Corporate Finance and Governance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-30 (All new papers)
- NEP-BAN-2010-10-30 (Banking)
- NEP-CBA-2010-10-30 (Central Banking)
- NEP-DGE-2010-10-30 (Dynamic General Equilibrium)
- NEP-MAC-2010-10-30 (Macroeconomics)
- NEP-MON-2010-10-30 (Monetary Economics)
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