Posted: 27 Nov 1998
Date Written: October 1, 1998
We study how the financial intermediation sector interacts with the real sector over the business cycle. We examine an overlapping generations model in which financial intermediaries can alleviate agency problems of entrepreneurs. We identify the conditions under which deteriorating balance sheets of firms affect the future lending of intermediaries and induce a lending channel effect. We show that such negative capital spillovers are less likely the greater are the agency problems that are not eliminated by financial intermediaries. We obtain a negative relationship between the extent of capital market frictions and the size and persistence of output fluctuations. Finally, our model generates a set of theoretical predictions about the behaviour of macroeconomic variables such as monitoring intensity, deposit and lending rates and interest rate spreads over the business cycle.
JEL Classification: E32, E44, E51, G21, G28
Suggested Citation: Suggested Citation
Gersbach, Hans, Financial Intermediation, Capital Spillovers and Business Fluctuation (October 1, 1998). Available at SSRN: https://ssrn.com/abstract=137581