Leverage Restrictions in a Business Cycle Model

Lawrence Christiano and Daisuke Ikeda

No 18688, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We modify an otherwise standard medium-sized DSGE model, in order to study the macroeconomic effects of placing leverage restrictions on financial intermediaries. The financial intermediaries ('bankers') in the model must exert effort in order to earn high returns for their creditors. An agency problem arises because banker effort is not observable to creditors. The consequence of this agency problem is that leverage restrictions on banks generate a very substantial welfare gain in steady state. We discuss the economics of this gain. As a way of testing the model, we explore its implications for the dynamic effects of shocks.

JEL-codes: E44 E5 E52 (search for similar items in EconPapers)
Date: 2013-01
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
Note: EFG
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Citations: View citations in EconPapers (40)

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Related works:
Chapter: Leverage Restrictions in a Business Cycle Model (2014)
Working Paper: Leverage Restrictions in a Business Cycle Model (2014)
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