Risk Dynamics with Heterogeneous Borrowers and Intermediaries

50 Pages Posted: 25 Jan 2021

See all articles by Sujan Lamichhane

Sujan Lamichhane

Johns Hopkins University - Carey Business School

Date Written: November 2020

Abstract

This paper studies the effects of borrowers' balance sheet heterogeneity on economywide risks and fragility, together with effects from intermediary balance sheet channel. We build a continuous time heterogeneous agents model with financial frictions and analytically characterize the transition dynamics. Once the economy moves to high leverage states, it tends to stay there — a leverage trap. Transition speed increases (decreases) when the economy is leveraging up (deleveraging) and when interest rate is lower. Tail uncertainty lasts longer during transition. Intermediary failure risk can lead to severe decline in borrowing/lending activities that could further slow the recovery process.

Keywords: heterogeneous agents, financial fragility, transition dynamics, debt distribution, intermediary failure risk, systemic risk

JEL Classification: E44, G20, G10

Suggested Citation

Lamichhane, Sujan, Risk Dynamics with Heterogeneous Borrowers and Intermediaries (November 2020). Available at SSRN: https://ssrn.com/abstract=3762463 or http://dx.doi.org/10.2139/ssrn.3762463

Sujan Lamichhane (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
17
Abstract Views
104
PlumX Metrics