Is the net worth of financial intermediaries more important than that of non-financial firms?

Naohisa Hirakata, Nao Sudo and Kozo Ueda

No 161, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: To explore the relative macroeconomic importance of financial intermediaries' (FIs?) net worth to that of non-financial firms (entrepreneurs), we extend the financial accelerator model of Bernanke, et al. (1999), such that both FIs? and entrepreneurs rely on costly external debt. Our model, which is calibrated to the U.S. economy, highlights two features of the FIs? net worth. First, the relative size of FIs' net worth as compared to entrepreneurial net worth, namely, the net- worth distribution in the economy, is important for the financial accelerator effect. Second, a shock to the FIs' net worth has greater aggregate impact than that to entrepreneurial net worth. The key reason for these findings is the low net worth of FIs? in the United States. Our results imply that the ongoing regulatory reforms that protect banks' net worth from irrational exuberance or foster its accumulation are beneficial for macroeconomic stability.

Pages: 43 pages
Date: 2013
New Economics Papers: this item is included in nep-dge
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