Kiel Working Papers, Kiel Institute for World Economics
No 1677:
Credit Risk Transfers and the Macroeconomy
Ester Faia
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 in.ation. 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; (follow links to similar papers)
JEL-Codes: E3,; E5,; G3; (follow links to similar papers)
42 pages, January 2011
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