Financial frictions : micro vs macro volatility

Seungcheol Lee, Ralph Luetticke, Morten O. Ravn

We introduce frictional ﬁnancial intermediation into a HANK model. Households are subject to idiosyncratic and aggregate risk and smooth consumption through savings and consumer loans intermediated by banks. The banking friction introduces an endogenous countercyclical spread between the interest rate on savings and on loans. This interacts with incomplete markets because borrowers and savers face diﬀerent intertemporal prices, and induces a time-varying mass point of high MPC households. Aggregate shocks through their impact on the spread give rise to consumption inequality. We show this mechanism to be empirically relevant. Ex-ante macro prudential regulation reduces welfare by reducing consumption smoothing.

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Year of publication:	[2021]
Authors:	Lee, Seungcheol ; Luetticke, Ralph ; Ravn, Morten O.
Publisher:	Frankfurt am Main, Germany : European Central Bank
Subject:	Business cycles \| financial frictions \| incomplete markets \| macroprudential regulation,monetary policy \| Unvollkommener Markt \| Incomplete market \| Konjunktur \| Business cycle \| Geldpolitik \| Monetary policy \| Volatilität \| Volatility \| Finanzmarkt \| Financial market \| Theorie \| Theory \| Schock \| Shock \| Finanzmarktaufsicht \| Financial supervision \| DSGE-Modell \| DSGE model