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Leverage Restrictions in a Business Cycle Model

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  • Lawrence Christiano
  • Daisuke Ikeda

Abstract

We modify an otherwise standard medium-sized DSGE model, in order to study the macroeconomic effects of placing leverage restrictions on financial intermediaries. The financial intermediaries ('bankers') in the model must exert effort in order to earn high returns for their creditors. An agency problem arises because banker effort is not observable to creditors. The consequence of this agency problem is that leverage restrictions on banks generate a very substantial welfare gain in steady state. We discuss the economics of this gain. As a way of testing the model, we explore its implications for the dynamic effects of shocks.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18688.

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Date of creation: Jan 2013
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Handle: RePEc:nbr:nberwo:18688

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  1. Matthias Kehrig, 2011. "The Cyclicality of Productivity Dispersion," Working Papers, Center for Economic Studies, U.S. Census Bureau 11-15, Center for Economic Studies, U.S. Census Bureau.
  2. Tobias Adrian & Paolo Colla & Hyun Song Shin, 2012. "Which Financial Frictions? Parsing the Evidence from the Financial Crisis of 2007-9," NBER Working Papers 18335, National Bureau of Economic Research, Inc.
  3. Tobias Adrian & Paolo Colla & Hyun Song Shin, 2013. "Which Financial Frictions? Parsing the Evidence from the Financial Crisis of 2007 to 2009," NBER Macroeconomics Annual, University of Chicago Press, University of Chicago Press, vol. 27(1), pages 159 - 214.
  4. Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 640, Board of Governors of the Federal Reserve System (U.S.).
  5. Saki Bigio, 2012. "Financial Risk Capacity," 2012 Meeting Papers, Society for Economic Dynamics 97, Society for Economic Dynamics.
  6. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 36(2), pages 269-300, November.
  7. Gertler, Mark & Kiyotaki, Nobuhiro & Queralto, Albert, 2012. "Financial crises, bank risk exposure and government financial policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 59(S), pages S17-S34.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Leverage Restrictions in a Business Cycle Model
    by Christian Zimmermann in NEP-DGE blog on 2014-07-11 14:12:22
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Cited by:
  1. Lawrence Christiano & Roberto Motto & Massimo Rostagno, 2013. "Risk Shocks," NBER Working Papers 18682, National Bureau of Economic Research, Inc.

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