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Search for Yield

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URI: https://hdl.handle.net/10016/33621
ISSN: 0012-9682
DOI: https://doi.org/10.3982/ECTA14057
UXXI: AR/0000020677
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yield_E_2017_ps.pdf (628.67 KB)
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2017-03
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Econometric Society
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Abstract
We present a model of the relationship between real interest rates, credit spreads, and the structure and risk of the banking system. Banks intermediate between entrepreneurs and investors, and can monitor entrepreneurs projects. We characterize the equilibrium for a xed aggregate supply of savings, showing that safer entrepreneurs will be funded by nonmonitoring banks and riskier entrepreneurs by monitoring banks. We show that an increase in savings reduces interest rates and spreads, increases the relative size of the nonmonitoring banking system and the probability of failure of monitoring banks. We also show that the dynamic version of the model exhibits endogenous boom and bust cycles, and rationalizes the existence of countercyclical risk premia and the connection between low interest rates, credit spreads, and the buildup of risks during booms.
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Savings glut, Real interest rates, Credit spreads, Bank monitoring, Financial stability, Banking crises, Boom and bust cycles
Bibliographic citation
Martinez Miera, D., Repullo, R. (2017). Search for Yield. Econometrica, 85(2), pp. 351-378
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DEE - Artículos de Revistas