Working Paper: CEPR ID: DP12800
Authors: Adriano A. Rampini; S. Viswanathan
Abstract: We propose a dynamic theory of financial intermediaries that are better able to collateralize claims than households, that is, have a collateralization advantage. Intermediaries require capital as they have to finance the additional amount that they can lend out of their own net worth. The net worth of financial intermediaries and the corporate sector are both state variables affecting the spread between intermediated and direct finance and the dynamics of real economic activity, such as investment, and financing. The accumulation of net worth of intermediaries is slow relative to that of the corporate sector. The model is consistent with key stylized facts about macroeconomic downturns associated with a credit crunch, namely, their severity, their protractedness, and the fact that the severity of the credit crunch itself affects the severity and persistence of downturns. The model captures the tentative and halting nature of recoveries from crises.
Keywords: collateral; financial intermediation; financial constraints; investment; financial crises
JEL Codes: G21; G32; E44; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial intermediaries possess a collateralization advantage over households (G51) | intermediaries lend more effectively (G21) |
| intermediaries must finance additional lending from their own net worth (G21) | spread between intermediated and direct finance (G29) |
| net worth of financial intermediaries and corporate sector (G29) | loan spreads and economic dynamics (G21) |
| slow accumulation of intermediary net worth relative to corporate net worth (D25) | severe and protracted downturns during credit crunches (E44) |
| severity of a credit crunch (E51) | depth of macroeconomic downturns and nature of recoveries (E32) |
| dynamics of intermediary capital and net worth (E22) | dynamics of financing spreads (G19) |