Financial Intermediation and Aggregate Fluctuations: A Quantative Analysis

42 Pages Posted: 20 Sep 2010

See all articles by Russell Cooper

Russell Cooper

University of Texas at Austin - Department of Economics; National Bureau of Economic Research (NBER)

João Ejarque

University of Essex - Department of Economics

Date Written: August 1994

Abstract

This paper investigates the quantitative implications of two business cycle models in which aggregate fluctuations arise in response to variations in the process of financial intermediation. In the first, fundamental shocks in the capital accumulation process lead to fluctuations in the real returns from intermediated investment. For this economy, we find that the correlations produced are not consistent with observations of the U.S. economy. In particular, consumption is not smoother than output, investment is negatively correlated with output, variations in the capital stock are quite large and interest rates are procyclical. In an economy with both intermediation and total factor productivity shocks, the correlations we produce are closer to those observed in the U.S. economy only when the intermediation shock is relatively unimportant. In the second economy, variations in the returns to intermediation are part of a sunspot equilibrium. Fluctuations here are driven by self-fulfilling beliefs by private agents regarding the returns to intermediation as in an economy beset by banking crises. For this non-linear economy, we find that the correlations are closer to those observed but the variability of capital relative to output is still too large.

Suggested Citation

Cooper, Russell W. and Gil Ejarque, João Miguel, Financial Intermediation and Aggregate Fluctuations: A Quantative Analysis (August 1994). NBER Working Paper No. w4819. Available at SSRN: https://ssrn.com/abstract=1677825

Russell W. Cooper (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

João Miguel Gil Ejarque

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

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