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Credit risk transfers and the macroeconomy

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  • Faia, Ester

Abstract

The recent financial crisis has highlighted the limits of the 'originate to distribute' model of banking, but its nexus with the macroeconomy and monetary policy remains unexplored. I build a DSGE model with banks (along the lines of Holmström and Tirole [28] and Parlour and Plantin [39]) and examine its properties with and without active secondary markets for credit risk transfer. The possibility of transferring credit reduces the impact of liquidity shocks on bank balance sheets, but also reduces the bank incentive to monitor. As a result, secondary markets allow to release bank capital and exacerbate the effect of productivity and other macroeconomic shocks on output and in.ation. By offering a possibility of capital recycling and by reducing bank monitoring, secondary credit markets in general equilibrium allow banks to take on more risk.

Suggested Citation

  • Faia, Ester, 2011. "Credit risk transfers and the macroeconomy," Kiel Working Papers 1677, Kiel Institute for the World Economy (IfW).
  • Handle: RePEc:zbw:ifwkwp:1677
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Grodecka, Anna, 2014. "Subprime borrowers, securitization and the transmission of business cycles," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100456, Verein für Socialpolitik / German Economic Association.
    2. Eleni Iliopulos & Thepthida Sopraseuth, 2012. "L'intermédiation financière dans l'analyse macroéconomique : le défi de la crise," Économie et Statistique, Programme National Persée, vol. 451(1), pages 91-130.
    3. Ignazio Angeloni, 2009. "A Tale of Two Policies: Prudential Regulation and Monetary Policy with Fragile Banks," Working Papers 345, Bruegel.
    4. Radde, Sören, 2015. "Flight to liquidity and the Great Recession," Journal of Banking & Finance, Elsevier, vol. 54(C), pages 192-207.
    5. repec:bof:bofrdp:urn:nbn:fi:bof-201602101026 is not listed on IDEAS
    6. Haavio, Markus & Ripatti, Antti & Takalo, Tuomas, 2016. "Saving Wall Street or main street," Research Discussion Papers 12/2016, Bank of Finland.
    7. repec:hal:psewpa:halshs-00744047 is not listed on IDEAS
    8. Anna Grodecka, 2013. "Subprime borrowers, securitization and the transmission of business cycles," Bonn Econ Discussion Papers bgse07_2013, University of Bonn, Germany.
    9. Radde, Sören, 2012. "Liquidity Crises, Banking, and the Great Recession," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 65408, Verein für Socialpolitik / German Economic Association.
    10. Silvo, Aino, 2016. "The interaction of monetary and macroprudential policies in economic stabilisation," Research Discussion Papers 1/2016, Bank of Finland.

    More about this item

    Keywords

    Credit risk transfer; dual moral hazard; monetary policy; liquidity; welfare;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G3 - Financial Economics - - Corporate Finance and Governance

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