Working Paper: NBER ID: w23245
Authors: Nuno Coimbra; Hélène Rey
Abstract: We develop a dynamic macroeconomic model with heterogeneous financial intermediaries and endogenous entry. Time-varying endogenous macroeconomic risk arises from the risk-shifting behaviour of the cross-section of financial intermediaries. When interest rates are high, a decrease in interest rates stimulates investment and decreases aggregate risk. In contrast, when they are low, further stimulus can increase financial instability while inducing a fall in the risk premium. In this case, there is a trade-off between stimulating the economy and financial stability. This provides a model of the risk-taking channel of monetary policy.
Keywords: Financial Cycles; Heterogeneous Intermediaries; Monetary Policy; Systemic Risk
JEL Codes: E32; E44; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high interest rates (E43) | decreased aggregate risk (D81) |
| high interest rates (E43) | increased investment (E22) |
| low interest rates (E43) | increased financial instability (F65) |
| low interest rates (E43) | reduction in risk premiums (G19) |
| decrease in interest rates (E43) | stimulate investment (E22) |
| risk-shifting behavior of financial intermediaries (G21) | dynamic between interest rates and financial stability (E43) |