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Credit Risk Transfers and the Macroeconomy

47 Pages Posted: 22 Oct 2010  

Ester Faia

Goethe University Frankfurt; Kiel Institute for the World Economy; French National Center for Scientific Research (CNRS) - Centre d'Etudes Prospectives d'Economie Mathematique Appliquees a la Planification (CEPREMAP)

Date Written: October 1, 2010

Abstract

The recent financial crisis has highlighted the limits of the "originate to distribute" model of banking, but its nexus with the macroeconomy and monetary policy remains unexplored. I build a DSGE model with banks (along the lines of Holmström and Tirole [28] and Parlour and Plantin [39]) and examine its properties with and without active secondary markets for credit risk transfer. The possibility of transferring credit reduces the impact of liquidity shocks on bank balance sheets, but also reduces the bank incentive to monitor. As a result, secondary markets allow to release bank capital and exacerbate the effect of productivity and other macroeconomic shocks on output and inflation. By offering a possibility of capital recycling and by reducing bank monitoring, secondary credit markets in general equilibrium allow banks to take on more risk.

Keywords: credit risk transfer, dual moral hazard, monetary policy, liquidity, welfare

JEL Classification: E3, E5, G3

Suggested Citation

Faia, Ester, Credit Risk Transfers and the Macroeconomy (October 1, 2010). ECB Working Paper No. 1256. Available at SSRN: https://ssrn.com/abstract=1685771

Ester Faia (Contact Author)

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Kiel Institute for the World Economy

P.O. Box 4309
Kiel, D-24100
Germany

French National Center for Scientific Research (CNRS) - Centre d'Etudes Prospectives d'Economie Mathematique Appliquees a la Planification (CEPREMAP)

Ecole Normale Superieure
48 boulevard Jourdan
75014 Paris
France

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