Working Paper: NBER ID: w18688
Authors: Lawrence Christiano; Daisuke Ikeda
Abstract: We modify an otherwise standard medium-sized DSGE model, in order to study the macroeconomic effects of placing leverage restrictions on financial intermediaries. The financial intermediaries ('bankers') in the model must exert effort in order to earn high returns for their creditors. An agency problem arises because banker effort is not observable to creditors. The consequence of this agency problem is that leverage restrictions on banks generate a very substantial welfare gain in steady state. We discuss the economics of this gain. As a way of testing the model, we explore its implications for the dynamic effects of shocks.
Keywords: leverage restrictions; business cycle model; financial intermediaries; welfare gain
JEL Codes: E44; E5; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| leverage restrictions on banks (G21) | welfare gain in steady state (D69) |
| leverage restrictions (G32) | efficiency of the banking system (G21) |
| leverage restrictions (G32) | agency problems between banks and creditors (G21) |
| lower leverage (G19) | incentives for bankers to exert effort (G21) |
| leverage restrictions (G32) | insulation of creditors from losses (G33) |
| dynamic shocks (C69) | declines in consumption, investment, output, and bank net worth (F65) |