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Banks’ leverage behaviour in a two-agent New Keynesian model

Author

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  • Andrea Boitani

    () (Department of Economics and Finance, Università Cattolica del Sacro Cuore)

  • Chiara Punzo

    () (Department of Economics and Finance, Università Cattolica del Sacro Cuore)

Abstract

In a NK model with two types of rational agents,savers and capitalists, and non-maximizing banks, fi?nancial shocks do affect the macroeconomic dynamics depending on banks ?behaviour as for their leverage ratio. We fi?rst show that the level of banks' leverage - which may be imposed by banks regulation - affects the steady state level of output, employment and consumption, as might be expected in a non-Modigliani-Miller world. Different banks? behaviour after a shock has widely different effects on the macroeconomic dynamics:passive leverage results to be shock absorbing and capable of neutralizing an initial fi?nancial shock,whilst procyclical behaviour implies higher and more persistent instability and distributive effects than the constant leverage behaviour. Finally, we show that the interaction of procyclical leverage with hysteres is in output and employment stregthens the persistence of fi?nancial shocks.

Suggested Citation

  • Andrea Boitani & Chiara Punzo, 2018. "Banks’ leverage behaviour in a two-agent New Keynesian model," DEM Working Papers Series 150, University of Pavia, Department of Economics and Management.
  • Handle: RePEc:pav:demwpp:demwp0150
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    More about this item

    Keywords

    Leverage; Procyclicality; Two-agent model; Non-maximising banks;

    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
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General
    • G01 - Financial Economics - - General - - - Financial Crises

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