Uncertainty and Investment: The Financial Intermediary Balance Sheet Channel

31 Pages Posted: 14 Apr 2015

See all articles by Sophia Chen

Sophia Chen

International Monetary Fund (IMF) - Research Department

Date Written: March 2015

Abstract

Rollover risk imposes market discipline on banks’ risk-taking behavior but it can be socially costly. I present a two-sided model in which a bank simultaneously lends to a firm and borrows from the short-term funding market. When the bank is capital constrained, uncertainty in asset quality and rollover risk create a negative externality that spills over to the real economy by ex ante credit contraction. Macroprudential and monetary policies can be used to reduce the social cost of market discipline and improve efficiency.

Keywords: Banks, Financial intermediaries, Investment, Balance sheets, Econometric models, Short-term debt, uncertainty, underinvestment, value, liquidation, capital, equity, revenue, risk, projects

JEL Classification: D86, E22, G20

Suggested Citation

Chen, Sophia, Uncertainty and Investment: The Financial Intermediary Balance Sheet Channel (March 2015). IMF Working Paper No. 15/65, Available at SSRN: https://ssrn.com/abstract=2594149

Sophia Chen (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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