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Risky lending, bank leverage and unconventional monetary policy

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  • Ferrante, Francesco

Abstract

A standard New Keynesian model is extended to include a rich financial system in which financially constrained banks lend to firms and homeowners via defaultable long-term loans. The model generates two endogenous components of interest rate spreads on mortgages and corporate loans: i) a default premium and ii) a liquidity premium. Financial shocks affecting these premiums can reproduce the behavior of several macroeconomic variables during the Great Recession, when we take into account the impact of the zero-lower-bound. The model is also used to quantify the effect of the Federal Reserve’s purchases of mortgage-backed securities during the last recession.

Suggested Citation

  • Ferrante, Francesco, 2019. "Risky lending, bank leverage and unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 100-127.
  • Handle: RePEc:eee:moneco:v:101:y:2019:i:c:p:100-127
    DOI: 10.1016/j.jmoneco.2018.07.014
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Financial frictions; Banking; Mortgages; Unconventional monetary policy; Zero lower bound;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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