Arbeitspapier

Business cycles and the balance sheets of the financial and non-financial sectors

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.

ISBN
978-92-9472-020-7
Sprache
Englisch

Erschienen in
Series: ESRB Working Paper Series ; No. 68

Klassifikation
Wirtschaft
Financial Markets and the Macroeconomy
Business Fluctuations; Cycles
Financial Crises
Thema
Financial Frictions
Financial Markets and the Macroeconomy
Financial Crises
Balance Sheet Channel

Ereignis
Geistige Schöpfung
(wer)
Villacorta, Alonso
Ereignis
Veröffentlichung
(wer)
European Systemic Risk Board (ESRB), European System of Financial Supervision
(wo)
Frankfurt a. M.
(wann)
2018

DOI
doi:10.2849/111676
Handle
Letzte Aktualisierung
10.03.2025, 11:42 MEZ

Datenpartner

Dieses Objekt wird bereitgestellt von:
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. Bei Fragen zum Objekt wenden Sie sich bitte an den Datenpartner.

Objekttyp

  • Arbeitspapier

Beteiligte

  • Villacorta, Alonso
  • European Systemic Risk Board (ESRB), European System of Financial Supervision

Entstanden

  • 2018

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