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Is the net worth of financial intermediaries more important than that of non-financial firms?

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  • Hirakata, Naohisa

    (Bank of Japan)

  • Sudo, Nao

    (Bank of Japan)

  • Ueda, Kozo

    (Waseda University)

Abstract

To explore the relative macroeconomic importance of financial intermediaries' (FIs’) net worth to that of non-financial firms (entrepreneurs), we extend the financial accelerator model of Bernanke, et al. (1999), such that both FIs’ and entrepreneurs rely on costly external debt. Our model, which is calibrated to the U.S. economy, highlights two features of the FIs’ net worth. First, the relative size of FIs' net worth as compared to entrepreneurial net worth, namely, the net- worth distribution in the economy, is important for the financial accelerator effect. Second, a shock to the FIs' net worth has greater aggregate impact than that to entrepreneurial net worth. The key reason for these findings is the low net worth of FIs’ in the United States. Our results imply that the ongoing regulatory reforms that protect banks' net worth from irrational exuberance or foster its accumulation are beneficial for macroeconomic stability.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 161.

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Length: 43 pages
Date of creation: 2013
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Handle: RePEc:fip:feddgw:161

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  1. Lawrence J. Christiano & Martin S. Eichenbaum & Mathias Trabandt, 2013. "Unemployment and Business Cycles," NBER Working Papers 19265, National Bureau of Economic Research, Inc.
  2. Hirakata, Naohisa & Sudo, Nao & Ueda, Kozo, 2011. "Do banking shocks matter for the U.S. economy?," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 35(12), pages 2042-2063.
  3. Zhang, Longmei, 2009. "Bank capital regulation, the lending channel and business cycles," Discussion Paper Series 1: Economic Studies 2009,33, Deutsche Bundesbank, Research Centre.
  4. Naohisa Hirakata & Nao Sudo & Kozo Ueda, 2011. "Capital Injection, Monetary Policy, and Financial Accelerators," IMES Discussion Paper Series 11-E-10, Institute for Monetary and Economic Studies, Bank of Japan.
  5. Brzoza-Brzezina, Michał & Kolasa, Marcin & Makarski, Krzysztof, 2013. "The anatomy of standard DSGE models with financial frictions," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(1), pages 32-51.
  6. Gilchrist, Simon & Leahy, John V., 2002. "Monetary policy and asset prices," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(1), pages 75-97, January.
  7. Van den Heuvel, Skander J., 2008. "The welfare cost of bank capital requirements," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(2), pages 298-320, March.
  8. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, American Economic Association, vol. 87(5), pages 893-910, December.
  9. Chen, Nan-Kuang, 2001. "Bank net worth, asset prices and economic activity," Journal of Monetary Economics, Elsevier, Elsevier, vol. 48(2), pages 415-436, October.
  10. Zeng, Zhixiong, 2011. "A theory of the non-neutrality of money with banking frictions and bank recapitalization," MPRA Paper 33471, University Library of Munich, Germany.
  11. David Aikman & Matthias Paustian, 2006. "Bank capital, asset prices and monetary policy," Bank of England working papers 305, Bank of England.
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