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Financial Intermediaries, Leverage Ratios and Business Cycles

  • Yasin Mimir

    (University of Maryland)

Registered author(s):

    I document cyclical properties of aggregate measures of liabilities, equity, and leverage ratio in the U.S. financial sector and those of credit spread. I find that (i) liabilities and equity are procyclical, leverage ratio is acyclical, and credit spread is countercyclical, (ii) financial variables are three to ten times more volatile than output, and (iii) financial variables lead the business cycle. I present a dynamic stochastic general equilibrium model with profit maximizing banks where bank equity mitigates a moral hazard problem between banks and their depositors. The driving sources of business cycles are shocks to bank equity as well as standard productivity shocks. The model generates real and financial fluctuations consistent with the U.S. data. The model also delivers some policy prescriptions about capital adequacy requirements of banks.

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    File URL: https://economicdynamics.org/meetpapers/2011/paper_19.pdf
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    Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 19.

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    Date of creation: 2011
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    Handle: RePEc:red:sed011:19
    Contact details of provider: Postal:
    Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

    Web page: http://www.EconomicDynamics.org/
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    1. Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2003. "External constraints on monetary policy and the financial accelerator," BIS Working Papers 139, Bank for International Settlements.
    2. Vasco Cúrdia & Michael Woodford, 2009. "Credit spreads and monetary policy," Staff Reports 385, Federal Reserve Bank of New York.
    3. Andrew T. Levin & Fabio M. Natalucci & Egon Zakrajsek, 2004. "The magnitude and cyclical behavior of financial market frictions," Finance and Economics Discussion Series 2004-70, Board of Governors of the Federal Reserve System (U.S.).
    4. Simon Gilchrist & Vladimir Yankov & Egon Zakrajsek, 2009. "Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets," NBER Working Papers 14863, National Bureau of Economic Research, Inc.
    5. Césaire Meh & Kevin Moran, 2008. "The Role of Bank Capital in the Propagation of Shocks," Staff Working Papers 08-36, Bank of Canada.
    6. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
    7. Francisco Covas & Wouter Denhaan, 2006. "The role of debt and equity finance over the business cycle," 2006 Meeting Papers 407, Society for Economic Dynamics.
    8. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Solving Dynamic General Equilibrium Models Using a Second-Order Approximation to the Policy Function," Departmental Working Papers 200106, Rutgers University, Department of Economics.
    9. Gertler, Mark & Kiyotaki, Nobuhiro, 2010. "Financial Intermediation and Credit Policy in Business Cycle Analysis," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 11, pages 547-599 Elsevier.
    10. Keith Acheson, 2011. "Globalization," Chapters, in: A Handbook of Cultural Economics, Second Edition, chapter 31 Edward Elgar Publishing.
      • Keith Acheson, 2003. "Globalization," Chapters, in: A Handbook of Cultural Economics, chapter 31 Edward Elgar Publishing.
    11. Korajczyk, Robert A. & Levy, Amnon, 2003. "Capital structure choice: macroeconomic conditions and financial constraints," Journal of Financial Economics, Elsevier, vol. 68(1), pages 75-109, April.
    12. Urban Jermann & Vincenzo Quadrini, 2012. "Macroeconomic Effects of Financial Shocks," American Economic Review, American Economic Association, vol. 102(1), pages 238-71, February.
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