Financial Cycles with Heterogeneous Intermediaries

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• Helene Rey (London Business School)
• Thursday 14 May 2020, 13:00-14:00
• Online.

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This paper develops a dynamic macroeconomic model with heterogeneous fi- nancial intermediaries and endogenous entry. It features time-varying endogenous macroeconomic risk that arises from the risk-shifting behaviour of the cross-section of financial intermediaries. We show that when interest rates are high, a decrease in interest rates stimulates investment and increases financial stability. In contrast, when interest rates are low, further stimulus can increase aggregate risk while inducing a fall in the risk premium. In this case, there is a trade-off between stimulating the economy and financial stability.

This talk is part of the Cambridge Finance Workshop Series series.

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