Risk Pooling, Intermediation Efficiency, and the Business Cycle

51 Pages Posted: 25 Mar 2020 Last revised: 24 Feb 2021

See all articles by Pietro Dindo

Pietro Dindo

Ca Foscari University of Venice - Dipartimento di Economia

Andrea Modena

University of Bonn

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE; Ca Foscari University of Venice

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Date Written: February 25, 2020

Abstract

We study the relationship between intermediation efficiency and the macroeconomic dynamics within a tractable real business cycle model where: households face restricted market participation; financial intermediaries use leverage to provide costly risk pooling and safe assets. We analytically characterize the general equilibrium effects that associate intermediation costs to the output dynamics and find that a more (less) efficient financial sector can lead 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 may generate pro- or counter cyclical real risk-free rates.

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

JEL Classification: E13, E32, E69, G12

Suggested Citation

Dindo, Pietro and Modena, Andrea and Pelizzon, Loriana, Risk Pooling, Intermediation Efficiency, and the Business Cycle (February 25, 2020). SAFE Working Paper No. 271, Available at SSRN: https://ssrn.com/abstract=3560852 or http://dx.doi.org/10.2139/ssrn.3560852

Pietro Dindo

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

Cannaregio 873
Venice, 30121
Italy

Andrea Modena

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

Loriana Pelizzon (Contact Author)

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

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

Leibniz Institute for Financial Research SAFE ( email )

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

HOME PAGE: http://www.safe-frankfurt.de

Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

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