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Uncertainty and Investment; The Financial Intermediary Balance Sheet Channel

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  • Sophia Chen

Abstract

Rollover risk imposes market discipline on banks’ risk-taking behavior but it can be socially costly. I present a two-sided model in which a bank simultaneously lends to a firm and borrows from the short-term funding market. When the bank is capital constrained, uncertainty in asset quality and rollover risk create a negative externality that spills over to the real economy by ex ante credit contraction. Macroprudential and monetary policies can be used to reduce the social cost of market discipline and improve efficiency.

Suggested Citation

  • Sophia Chen, 2015. "Uncertainty and Investment; The Financial Intermediary Balance Sheet Channel," IMF Working Papers 15/65, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:15/65
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    References listed on IDEAS

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    1. Viral V. Acharya & Douglas Gale & Tanju Yorulmazer, 2011. "Rollover Risk and Market Freezes," Journal of Finance, American Finance Association, vol. 66(4), pages 1177-1209, August.
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    11. Eisenbach, Thomas M., 2013. "Rollover risk as market discipline: a two-sided inefficiency," Staff Reports 597, Federal Reserve Bank of New York, revised 01 Oct 2016.
    12. Marcin Kacperczyk & Philipp Schnabl, 2010. "When Safe Proved Risky: Commercial Paper during the Financial Crisis of 2007-2009," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 29-50, Winter.
    13. Jeanne Verrier & Fabian Valencia, 2013. "Aggregate Uncertainty and the Supply of Credit," 2013 Meeting Papers 514, Society for Economic Dynamics.
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    Cited by:

    1. Okahara, Naoto, 2018. "Banks' Disclosure of Information and Financial Stability Regulations," MPRA Paper 86409, University Library of Munich, Germany.
    2. Theodore Panagiotidis & Panagiotis Printzis, 2019. "What is the Investment Loss due to Uncertainty?," Working Paper series 19-06, Rimini Centre for Economic Analysis.

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