Working Paper: CEPR ID: DP10265
Authors: Vincenzo Quadrini
Abstract: The financial intermediation sector is important not only for channeling resources from agents in excess of funds to agents in need of funds (lending channel). By issuing liabilities it also creates financial assets held by other sectors of the economy for insurance purpose. When the intermediation sector creates less liabilities or their value falls, agents are less willing to engage in activities that are individually risky but desirable in aggregate (bank liabilities channel). The paper studies how financial crises driven by self-fulfilling expectations are transmitted, through this channel, to the real sector of the economy.
Keywords: banking crises; macroeconomic volatility; transmission channel
JEL Codes: E32; E44; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bank liabilities (G21) | economic activity (E20) |
| reduction in bank liabilities (G21) | investment and consumption by households and firms (E20) |
| bank leverage (G21) | macroeconomic stability (E60) |
| good equilibrium (D50) | high financial intermediation and economic activity (G20) |
| bad equilibrium (D59) | low intermediation and economic downturns (E44) |
| self-fulfilling expectations about liquidity (E41) | financial crises (G01) |