Firm risk shocks and the banking accelerator
DEMS Economics Webinar series Professor Vivien Lewis (Research Centre, Deutsche Bundesbank) will present the paper:
“Firm risk shocks and the banking accelerator”
with Tommaso Gasparini, Stéphane Moyen and Stefania Villa
Wednesday, October 6, 12:00
Online through Zoom (Meeting ID: 952 0528 5494 Passcode: 011082)
ABSTRACT
Increases in firm default risk raise the default probability of banks in US data. We analyse firm risk shocks in a New Keynesian business cycle model, where entrepreneurs and banks engage in a loan contract and both are subject to idiosyncratic default risk. We show that, through a fall in equity, bank owners partly absorb the losses on banks' balance sheets that originate from a wave of corporate defaults. Bank capital buffers help to cushion the contractionary effects of firm risk shocks. We analyze how different combinations of interest rate rules and macroprudential policies can mitigate the adverse consequences of such shocks.