According to gorton, winton 2002, financial intermediation is the root institution in the savingsinvestment process. The country that has the most developed financial sector takes on a larger proportion of global fundamental and financial risk because its financial intermediaries are better able to deal with funding problems. Request pdf financial intermediation and credit policy in business cycle analysis we develop a canonical framework to think about credit market frictions. Financial shocks and credit frictions in banking sector are important not only for explaining the. Financial intermediation, investment dynamics and business. Financial intermediaries, leverage ratios, and business cycles. Financial intermediation and real estate prices impact on. Lecture 8 financial intermediation and credit policy in business cycle analysis based on gertler and kiyotaki, 2011 mark gertler, visting columbia spring 2014 0 objective present canonical framework relevant to thinking about current crisis.
Introduction hile the term the great recession has been loosely applied to almost every economic downturn in the past twenty years, the crisis of 200709 hasmore than most recessionslived up to that name. The financial and business cycles in the united states graph 1 1 the financial cycle as measured by a frequencybased bandpass filters capturing mediumterm cycles in real credit, the credit togdp ratio and real house prices. The model highlights the interaction between the real exchange rate, interest rates, and financial frictions. Business cycle analysis mark gertler and nobuhiro kiyotaki. Pdf financial intermediation, international risk sharing. Financial intermediation and credit policy in business.
This paper conducts a quantitative analysis of the role of financial shocks and credit frictions affecting the banking sector in driving u. Comment on financial intermediation and credit policy in business cycle analysis. Financial intermediation and credit policy in a business cycle analysis. Financial intermediation and credit policy in business cycle analysis mark gertler and nobuhiro kiyotaki nyu and princeton. I draw on the nancial intermediation framework of gertler and karadi 2011 henceforth gki 2011 and gertler and. Financial intermediaries, credit shocks and business cycles. Financial intermediation and credit policy in business cycle analysis model the model i banks intermediate funds between households and rms. Financial intermediation and credit policy in business cycles. I the global financial cycle and international capital flows. Economic and social research institute, cabinet office. Financial intermediation and macroeconomic analysis. Financial intermediation and credit policy in business cycle. We develop a canonical framework to think about credit market frictions and aggregate economic activity in the context of the current crisis.
Terrones1 april 2011 abstract this paper provides a comprehensive analysis of financial cycles using a large database covering 21 advanced countries over the period 1960. We use the framework to address two issues in particular. Financial friction equilibrium depp,osits, d, higher with n. It illustrates how such a model could be used for policy analysis in an emerging market economy where policymakers are concerned about risks associated with rapid credit growth, financial dollarization, and foreign. We develop a canonical framework to think about credit market frictions and aggregate economic activity in the. We will distinguish between factors at the bank, financial system and countrylevel. Financial intermediation and credit policy in business cycle analysis introduction on the basis of these simulations, they argue that i their nancial frictions help generate a realistic looking recession size wise. Understanding phenomena such as the recent financial crisis, and possible policy responses, requires the use of a macroecono. I first document three key business cycle stylized facts of aggregate financial variables in the u. Financial intermediation, investment dynamics, and business cycle fluctuations by andrea ajello.
Financial intermediation and credit policy in business cycle analysis, handbook of monetary economics, in. Basically, financial intermediation is the root institution in the savingsinvestment process. Financial intermediation and credit policy in business cycle analysis agenda introductionenvironment modelpoliciescalibration and simulationresults i the central bank is not balance sheet constrained. N2 we develop a canonical framework to think about credit market frictions and aggregate economic activity in the context of the current crisis. The model used is able to replicate the countercyclical pattern of credit standards documented by the literature. Redistribution from workers to bankers increases welfare. I find that i liabilities and equity are procyclical, leverage ratio is acyclical, and credit spread is countercyclical, ii financial variables are three to ten times more volatile than output, and iii financial variables lead the. The benefits from a better financial technology are maximized when it is used to invest in exante riskier, but more profitable, investment projects. Gertler m, kiyotaki n 2011 financial intermediation and credit policy in business cycle analysis in handbook of monetary economics by benjamin m. We use the framework to focus on two issues in particular. Financial intermediation can be described as the process performed by financial intermediaries of collecting savings and deposits from savers and depositors and lending out the same to borrowers. In the following two chapters i focus on the relation between the performance of the financial sector and business cycle fluctuations.
Pdf financial cycle, business cycle and monetary policy. A macromodelers point of view june 24, 2010 shinichi nishiyama. Discussant financial intermediation and credit policy in. T1 financial intermediation and credit policy in business cycle analysis. Make one period, xed interest rate deposits with the banks. Financial intermediation and macroeconomic analysis mmichael woodford is the john bates clark professor of political economy, columbia univerichael woodford is the john bates clark professor of political economy, columbia univer. Overall, the specific business cycle model is a hybrid of gertler and karadis 2009 framework that allows for financial intermediation and kiyotaki and moores 2008 framework that allows for liquidity risk. Financial intermediation and macroeconomic analysis by michael woodford. Not a comprehensive or complete description only a rst pass at organizing thinking goal.
The evolution of banks and financial intermediation. Financial intermediation and credit policy in business cycle analysis gertlerand kiotaki2009 professor pengfei wang fatemeh kazempourlong. Beck and hesse 2006 investigate why financial intermediation cost is high in uganda. Mandel, and lindsay mollineaux 3 regulations role in bank changes peter olson 21 the rise of the originatetodistribute model and the role of banks in financial. I use micro data to quantify key features of us firm financing. Financial intermediation, investment dynamics, and business. Financial intermediation and credit policy in business cycle analysis by mark gertler, nobuhiro kiyotaki, david andolfatto, larry christiano, harris dellas, ian dewbecker, giovanni di bartolomeo, chris erceg, simon gilchrist, arvind krishnamurthy, ramon marimon, shinichi nishiyama, thanks albert and queralto olive. Mandel, and lindsay mollineaux 3 regulations role in bank changes peter olson 21 the rise of the originatetodistribute model and the role of banks in financial intermediation vitaly m. Financial intermediation, economic development and business. Financial intermediation and credit policy in business cycle analysis mark gertler and nobuhiro kiyotaki n.
I show that the inclusion of the nancing gap share data helps the estimation identify the common medium and low frequency changes in credit conditions that a ect borrowing costs as well as corporate nancial needs for xed investment and the business cycle. This paper develops an open economy model in which financial intermediation is subject to occasionally binding collateral constraints, and uses the model to study unconventional policies such as credit facilities and foreign exchange intervention. March 2010 abstract we develop a canonical framework to think about credit market frictions and aggregate economic activity in. Capital flows, financial intermediation and macroprudential. Also, the transmission mechanism of monetary policy may be through the banking system. No discussion on the impact of credit policies on nonfinancial firms. The financial and business cycles in the united states graph 1 1 the financial cycle as measured by a frequencybased bandpass filters capturing mediumterm cycles in real credit, the credittogdp ratio and real house prices. First, i study the impact of credit standards policies. February 2010 abstract we develop a canonical framework to help organize thinking about credit market frictions and aggregate economic activity in the context of the current crisis. Financial cycle, business cycle and monetary policy. Financial friction only happens when banks collects deposit from households or get loan from. Financial intermediation and credit policy in business cycle analysis gertlerand kiotaki2009 professor pengfei wang fatemeh kazempourlong 1. The increase in the probability of default during expansionary periods reduces the efficiency with which investment is. Introduction hile the term the great recession has been loosely applied to almost every economic downturn in the past twenty years, the crisis of 200709 hasmore than most recessionslived up to that.
March 2010 abstract we develop a canonical framework to think about credit market frictions and aggregate economic activity in the context of the current crisis. Comment on financial intermediation and credit policy in. Financial intermediation, economic development and. Financial intermediation and credit policy in business cycle analysis. Financial intermediaries, leverage ratios, and business. Low net worth of bankers reduces intermediation below first. Specifically, we analyze cycles in credit, house prices, and equity prices.
We keep the core macro model simple in order to clearly see. I document cyclical properties of aggregate measures of liabilities, equity, and leverage ratio in the u. I provide a framework for understanding the global financial architecture as an equilibrium outcome of the risk sharing between countries with different levels of financial development. A canonical model of financial intermediation and business fluctuations. Yepez, financial intermediation, consumption dynamics, and business cycles, economic modelling, 2017, 60, 231crossref. Financial intermediation and credit policy in business cycle analysis article in handbook of monetary economics 3. Understanding phenomena such as the recent financial crisis, and possible policy responses, requires the use of. Published in volume 24, issue 4, pages 2144 of journal of economic perspectives, fall 2010, abstract.