Journal
JOURNAL OF MONETARY ECONOMICS
Volume 59, Issue -, Pages S17-S34Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.jmoneco.2012.11.007
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Funding
- NSF
- Direct For Social, Behav & Economic Scie
- Divn Of Social and Economic Sciences [0960757] Funding Source: National Science Foundation
- Divn Of Social and Economic Sciences
- Direct For Social, Behav & Economic Scie [1061756] Funding Source: National Science Foundation
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A macroeconomic model with financial intermediation is developed in which the intermediaries (banks) can issue outside equity as well as short term debt. This makes bank risk exposure an endogenous choice. The goal is to have a model that can not only capture a crisis when banks are highly vulnerable to risk, but can also account for why banks adopt such a risky balance sheet in the first place. We use the model to assess quantitatively how perceptions of fundamental risk and of government credit policy in a crisis affect the vulnerability of the financial system ex ante. We also study the effects of macro-prudential policies designed to offset the incentives for risk-taking. (C) 2012 Published by Elsevier B.V.
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