header

Risk Pooling, Intermediation Efficiency, and the Business Cycle

51 Pages Posted: 30 Jun 2021 Last revised: 29 Nov 2021 Publication Status: Under Review

See all articles by Andrea Modena

Andrea Modena

University of Bonn

Pietro Dindo

Ca Foscari University of Venice - Dipartimento di Economia

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration

Multiple version iconThere are 3 versions of this paper

Abstract

We study the relationship between intermediation efficiency and the macroeconomic dynamics within a tractable real business cycle model with financial frictions. Households finance firms but, due to restricted equity market participation, cannot pool their idiosyncratic risks. Financial intermediaries provide costly risk pooling by issuing safe assets via balance sheet leverage. We characterize the general equilibrium effects that associate intermediation costs to the output dynamics and show that a more (less) efficient financial sector leads to higher (lower) growth, but also amplifies (dampens) output fluctuations. Relatedly, we identify the mechanisms by which the financial sector’s impact on growth and its safe assets provision generate pro- or counter-cyclical real risk-free rates.

Keywords: Amplification, business cycle, Efficiency, dampening, restricted market participation, risk pooling

Suggested Citation

Modena, Andrea and Dindo, Pietro and Pelizzon, Loriana, Risk Pooling, Intermediation Efficiency, and the Business Cycle. Available at SSRN: https://ssrn.com/abstract=3877120

Andrea Modena (Contact Author)

University of Bonn ( email )

Adenauerallee 24
Bonn, Hessen 53113
Germany
+(49) 228739209 (Phone)
30121 (Fax)

HOME PAGE: http://https://sites.google.com/view/andrea-modena/home?authuser=0

Pietro Dindo

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

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

Paper statistics

Abstract Views
220
Downloads
27
PlumX Metrics