Financial Intermediation, Capital Spillovers and Business Fluctuation

Posted: 27 Nov 1998  

Hans Gersbach

Swiss Federal Institute of Technology Zurich, (CER-ETH); IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Date Written: October 1, 1998

Abstract

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

Gersbach, Hans, Financial Intermediation, Capital Spillovers and Business Fluctuation (October 1, 1998). Available at SSRN: https://ssrn.com/abstract=137581

Hans Gersbach (Contact Author)

Swiss Federal Institute of Technology Zurich, (CER-ETH) ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland
+41 44 632 82 80 (Phone)
+41 44 632 18 30 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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