Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/193575
Authors: 
Villacorta, Alonso
Year of Publication: 
2018
Series/Report no.: 
ESRB Working Paper Series 68
Abstract: 
I propose and estimate a dynamic model of financial intermediation to study the different roles of the condition of banks' and firms' balance sheets in real activity. The net worth of firms determines their borrowing capacity both from households and banks. Banks provide risky loans to multiple firms and use their diversified portfolio as collateral to borrow from households. This intermediation process allows additional funds to flow from households to firms. Banks require net worth for intermediation as they are exposed to aggregate risk. The net worth of banks and firms are both state variables. In normal recessions, firm and bank net worth play the same role, so their sum determines the allocation of capital. During financial crises, shocks to bank net worth have an additional effect beyond that in standard financial frictions' models. This mechanism works through intermediation and affects activity, even if shocks redistribute net worth from banks to firms. I estimate my model and find that the new mechanism accounts for 40% of the fall in output and 80% of the fall in bank net worth during the Great Recession. Finally, the model is consistent with the different dynamics of the share of bank loans in total firm debt and credit spreads during the recessions of 1990, 2001, and 2008.
Subjects: 
Financial Frictions
Financial Markets and the Macroeconomy
Financial Crises
Balance Sheet Channel
JEL: 
E44
E32
G01
Persistent Identifier of the first edition: 
ISBN: 
978-92-9472-020-7
Document Type: 
Working Paper
Social Media Mentions:

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.