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Financial Frictions: Macro vs Micro Volatility

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  • Lee, Seungcheol
  • Luetticke, Ralph
  • Ravn, Morten O

Abstract

We examine the impact of frictional financial intermediation in a HANK model. An incentive problem restricts banking sector leverage and gives rise to an equilibrium spread between the returns on savings and debt. The size of this spread impacts on the wealth distribution and movements in it subject borrowers and savers to different intertemporal prices. The model generates a financial accelerator that is larger than in a representative agent setting, derives mainly from consumption rather than investment, and works through a countercyclical interest rate spread. Credit policy can mute this mechanism while stricter regulation of banking sector leverage inhibits households' ability to smooth consumption in response to idiosyncratic risk. Thus, although leverage restrictions stabilize at the aggregate level, we find substantial welfare costs.

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  • Lee, Seungcheol & Luetticke, Ralph & Ravn, Morten O, 2020. "Financial Frictions: Macro vs Micro Volatility," CEPR Discussion Papers 15133, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:15133
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    Cited by:

    1. Francesco Ferrante & Nils Gornemann, 2022. "Devaluations, Deposit Dollarization, and Household Heterogeneity," International Finance Discussion Papers 1336, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    Keywords

    business cycles; Financial Frictions; incomplete markets; macroprudential policy; monetary policy;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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