Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/215431
Authors: 
Dindo, Pietro
Modena, Andrea
Pelizzon, Loriana
Year of Publication: 
2020
Series/Report no.: 
SAFE Working Paper No. 271
Abstract: 
This paper studies the impact of financial sector size and leverage on business cycles and risk-free rates dynamics. We model a general equilibrium productive economy where financial intermediaries provide costly risk mitigation to households by pooling the idiosyncratic risks of their investment activities. We find that leverage amplifies variations of intermediaries' relative size, but may also mitigate the business cycle. Moreover, it makes risk-free rates pro-cyclical. Households benefit the most when the financial sector is neither too small, thus avoiding high consumption fluctuations and costly mitigation, nor too big, so that fewer resources are lost after intermediation costs.
Subjects: 
Business Cycle
Frictions
Leverage
Mitigation
Risk Pooling
JEL: 
E13
E32
E69
G12
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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