Systematic Financial Intermediation and Business Cycles

65 Pages Posted: 5 Mar 2020

See all articles by Paul Borochin

Paul Borochin

University of Miami - Department of Finance

Ujjal Chatterjee

Date Written: January 8, 2020

Abstract

Theory suggests that financial intermediation (FI) spurs economic growth by reducing investment frictions. Prior literature focuses on bank lending as a driver of economic growth, with limited success for US GDP. We augment bank balance sheet data with that from shadow banks, mutual and pension funds, insurers, and brokers, finding that aggregate FI assets lead GDP growth and forecast recessions up to three quarters in advance, although the weight of each FI group in the aggregate fluctuates. Aggregated FIs expand their total assets when the slope of the Treasury yield curve is upward sloping and the effective Federal funds rate is higher, thereby revealing the importance of monetary policy in the financial intermediation process. We further show that aggregate FI contains leading information about investment and consumption and predicts industrial production and unemployment.

Keywords: Business Cycles, Financial Intermediation, Monetary Policy, Recessions, Bank Liquidity Creation

JEL Classification: G12, G21, E44,E47

Suggested Citation

Borochin, Paul and Chatterjee, Ujjal, Systematic Financial Intermediation and Business Cycles (January 8, 2020). Available at SSRN: https://ssrn.com/abstract=3534432 or http://dx.doi.org/10.2139/ssrn.3534432

Paul Borochin (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

No contact information is available for Ujjal Chatterjee

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