Bank Leverage Cycles

Galo Nuño; Carlos Thomas

doi:10.1257/mac.20140084

journal article Apr 01, 2017

Bank Leverage Cycles

Galo Nuño Carlos Thomas

American Economic Journal: Macroeconomics Vol. 9 No. 2 pp. 32-72 · American Economic Association

View at Publisher Save 10.1257/mac.20140084

Abstract

We propose a general equilibrium framework with financial intermediaries subject to endogenous leverage constraints, and assess its ability to explain the observed fluctuations in intermediary leverage and real economic activity. In the model, intermediaries (“banks”) borrow in the form of short-term risky debt. The presence of risk-shifting moral hazard gives rise to a leverage constraint, and creates a link between the volatility in bank asset returns and leverage. Unlike TFP or capital quality shocks, volatility shocks produce empirically plausible fluctuations in bank leverage. The model replicates well the fall in leverage, assets, and GDP during the 2007–2009 financial crisis. (JEL D82, E44, G01, G21, G32)

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References

Details

Published: Apr 01, 2017
Vol/Issue: 9(2)
Pages: 32-72

Authors

G

Galo Nuño

Banco de España, Alcalá 48, 28014 Madrid, Spain (e-mail: )

C

Carlos Thomas

Banco de España, Alcalá 48, 28014 Madrid, Spain (e-mail: )

Cite This Article

Galo Nuño, Carlos Thomas (2017). Bank Leverage Cycles. American Economic Journal: Macroeconomics, 9(2), 32-72. https://doi.org/10.1257/mac.20140084

Bank Leverage Cycles

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