Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/207747 
Year of Publication: 
2019
Series/Report no.: 
NBB Working Paper No. 367
Publisher: 
National Bank of Belgium, Brussels
Abstract: 
This paper analyses the risk amplification inherent in a macroeconomic model with a heterogeneous financial sector. It extends a model with an equity-constrained intermediary by adding a shadow banking intermediary with pro-cyclical leverage. It is shown that the inclusion of this intermediary significantly amplifies financial frictions and adds to financial instability. Quantitative effects on asset prices are magnified, and the amplification propagates to the real side of the macroeconomy. Reducing the size of the shadow banking sector involves a trade-off between stabilizing the economy and the expected growth of economic activity. Ignoring the heterogeneity of the financial sector may lead to an underestimation of the excess risk-taking due to the anticipation of expansionary policies and of financial and macroeconomic responses to shocks.
Subjects: 
financial frictions
financial constraints
Endogenous risk
Shadow banking
JEL: 
G2
G12
E44
Document Type: 
Working Paper

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