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Retirement in the Shadow (Banking)

Listed author(s):
  • Facundo Piguillem

    (EIEF)

  • Guillermo Ordonez

    (University of Pennsylvania)

We analyze the aggregate implications of the increase in life expectancy with the emergence of shadow banking. We consider a standard overlapping generations economy with neoclassical technology. Agents live and work with certainty for the first part of their life and then retire and can die with constant probability. Since after retirement agents cannot work and have an uncertain life span, they buy insurance during their working life in the form of equity or annuities. These financial instruments are provided by a financial intermediary with CRS technology. The intermediation cost has two main components, a constant cost per unit of loan and a liquidity cost. We show that since 1990 there has been a large decrease in the borrowing and lending interest rate spread, and that almost all of it is due to the fall in the liquidity cost attributed to emergence of shadow banking. At the same time, life expectancy has increased substantially from 74 years in 1980 to around 79 years. We calibrate the model economy to replicate the level of financial intermediation in 1980 and then introduce the observed changes in the liquidity cost and life expectancy. The model generates the same increase in the quantities intermediated and changes in prices as observed in the data. Neither the decrease in the liquidity cost or the change in life expectancy alone account for the observed changes.

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Paper provided by Society for Economic Dynamics in its series 2015 Meeting Papers with number 1200.

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Date of creation: 2015
Handle: RePEc:red:sed015:1200
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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