Working Paper: NBER ID: w23302
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 can borrow against their loans only to the extent that households themselves can collateralize the assets backing these loans. 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: financial intermediaries; capitalization; credit crunch; economic dynamics
JEL Codes: E02; E32; E51; G01; G21; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial intermediaries (G20) | collateralization advantage (G32) |
| net worth of financial intermediaries (G29) | loan spreads (G51) |
| loan spreads (G51) | corporate investment (G31) |
| decrease in intermediary net worth (G32) | rise in loan spreads (F65) |
| credit crunch severity (E51) | recovery dynamics (C69) |
| slow accumulation of intermediary capital (E22) | halting nature of recoveries (E32) |
| net worth of financial intermediaries and firms (G29) | dynamics of economic activity (E32) |