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Financial Intermediaries and the Macroeconomy: New Advances

Paper Session

Sunday, Jan. 7, 2018 8:00 AM - 10:00 AM

Pennsylvania Convention Center, 109-A
Hosted By: American Economic Association
  • Chair: Roberto Robatto, University of Wisconsin-Madison

A Macroeconomic Model With Financial Panics

Mark Gertler
New York University
Nobuhiro Kiyotaki
Princeton University
Andrea Prestipino
Federal Reserve Board


We incorporate banks and banking panics within a conventional New Keynesian model. We analyze both qualitatively and quantitatively the dynamics of a banking panic in our model economy. We are particularly interested in characterizing the sudden and discrete nature of a financial collapse as well as the circumstances that make the economy vulnerable to such collapse in some instances but not in others. In line with what we observed during the recent financial crisis, a run on the financial system leads to a sudden spike in credit spreads and a sharp and protracted contraction in financial and real activity even in the absence of any apparent large exogenous disturbance to the economy. In equilibrium, runs become more likely when banks are poorly capitalized and highly leveraged. Anticipation of a run has harmful effects on the economy even if the run does not materialize ex-post. Finally, we study the effectiveness of different policies in containing crises.

The Effects of Capital Requirements on Good and Bad Risk Taking

Aaron Pancost
University of Texas-Austin
Roberto Robatto
University of Wisconsin-Madison


We identify a new channel by which deposit insurance and capital requirements affect welfare in general equilibrium. In the model, entrepreneurs have access to socially valuable projects whose return is subject to idiosyncratic, uninsurable risk. This risk reduces the entrepreneurs’ investment and gives rise to a demand for safe assets, which are supplied by banks. If the government provides subsidized deposit insurance, banks pay a higher risk-adjusted return on deposits and entrepreneurs increase their investment in the socially-valuable projects. The optimal capital requirement trades off this effect with the moral hazard induced by deposit insurance.

Retirement in the Shadow (Banking)

Guillermo Ordonez
University of Pennsylvania
Facundo Piguillem
Einaudi Institute for Economics and Finance


The U.S. economy has recently experienced a large increase in life expectancy and in shadow banking activities. We argue these two phenomena are intimately related. Agents resort on financial intermediaries to buy insurance against an uncertain life span after retirement. When they expect to live longer they are more prone to rely on financial intermediaries that are riskier but offer better terms for insurance -- shadow banks. We calibrate the model to replicate the level of financial intermediation in 1980, introduce the observed change in life expectancy and show that the demographic transition is critical to account for the boom both of shadow banking and credit that preceded the recent U.S. financial crisis. We construct a counterfactual without shadow banks and show that they may have contributed 0.5GDP, which is larger than the cost of the crisis of around 0.2GDP.

Interventions in Markets With Adverse Selection: Implications for Discount Window Stigma

Huberto Ennis
Federal Reserve Bank of Richmond


I study the implications for central bank discount window stigma of the model by Philippon and Skreta (2012). I take an equilibrium perspective for a given discount window program instead of following the program-design approach of the original paper. This allows me to narrow the focus on the model’s positive predictions. In the model, firms (banks) need to borrow to finance a productive project. There is limited liability and firms have private information about their ability to repay their debts. This creates an adverse selection problem. The central bank can ameliorate the impact of adverse selection by lending to firms. Discount window borrowing is observable and it may be taken as a signal of firms’ credit worthiness. Under some conditions, firms borrowing from the discount window may pay higher interest rates to borrow in the market, a phenomenon often associated with the presence of stigma. I discuss these conditions in detail and what they suggest about the relevance of stigma as an empirical phenomenon.
Javier Bianchi
Federal Reserve Bank of Minneapolis
Juliane Begenau
Harvard Business School
Pablo D'Erasmo
Federal Reserve Bank of Philadelphia
Jennifer La'O
Columbia University
JEL Classifications
  • E0 - General
  • G2 - Financial Institutions and Services