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SUMMARY:Intermediary Leverage Cycles and Financial Stability - Adrian\, T 
 (Federal Reserve Bank of New York)
DTSTART:20141215T093000Z
DTEND:20141215T101500Z
UID:TALK56629@talks.cam.ac.uk
CONTACT:Mustapha Amrani
DESCRIPTION:Co-author: Nina BOYARCHENKO (Federal Reserve Bank of New York 
 ) \n\nWe develop a theory of financial intermediary leverage cycles in the
  context of a dynamic model of the macroeconomy. The interaction between a
  production sector\, a financial intermediation sector\, and a household s
 ector gives rise to amplification of fundamental shocks that affect real e
 conomic activity. The model features two state variables that represent th
 e dynamics of the economy: the net worth and the leverage of financial int
 ermediaries. The leverage of the intermediaries is procyclical owing to ri
 sk-sensitive funding constraints. Relative to an economy with constant lev
 erage\, financial intermediaries generate higher output and consumption gr
 owth and lower consumption volatility in normal times\, but at the cost of
  systemic solvency and liquidity risks. We show that tightening intermedia
 ries risk constraints affects the systemic risk-return trade-off\, by lowe
 ring the likelihood of systemic crises at the cost of higher pricing of ri
 sk. Our model thus represents a conceptual framework for cyclical macropru
 dential policies within a dynamic stochastic general equilibrium model.\n\
 n\n
LOCATION:Seminar Room 1\, Newton Institute
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