Foreseen Risks / João F. Gomes, Marco Grotteria, Jessica Wachter.

Format:

Book

Author/Creator:

Gomes, João F.

Contributor:

National Bureau of Economic Research.

Grotteria, Marco.

Wachter, Jessica.

Series:

Working Paper Series (National Bureau of Economic Research) no. w25277.

NBER working paper series no. w25277

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

Large crises tend to follow rapid credit expansions. Causality, however, is far from obvious. We show how this pattern arises naturally when financial intermediaries optimally exploit economic rents that drive their franchise value. As this franchise value fluctuates over the business cycle, so too do the incentives to engage in risky lending. The model leads to novel insights on the effects of unconventional monetary policies in developed economies. We argue that bank lending might have responded less than expected to these interventions because they enhanced franchise value, inadvertently encouraging banks to pursue safer investments in low-risk government securities.

Notes:

Print version record

November 2018.