Heterogeneous capital and misintermediation

A perennial problem of financial markets is that of maturity mismatch, or misintermediation, a situation in which financial intermediaries fund long-term, illiquid loans with short-term liabilities. A previous theory concludes that misintermediation can be responsible for business cycles and yields...

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Bibliographic Details
Published in:Journal of macroeconomics 2017-09, Vol.53, p.16-41
Main Authors: Guo, Feng, McCulloch, J.H.
Format: Article
Language:English
Subjects:
Austrian business cycle theory
Heterogeneous capital
Misintermediation
Term structure of interest rates
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Summary:A perennial problem of financial markets is that of maturity mismatch, or misintermediation, a situation in which financial intermediaries fund long-term, illiquid loans with short-term liabilities. A previous theory concludes that misintermediation can be responsible for business cycles and yields procyclical behavior of surprises in real interest rates. This paper proposes a finite horizon structural model with the introduction of heterogeneous capital to formalize and develop that theory. An extended model with labor as well as a “harvesting” technology further investigates the impact of misintermediation on real factor prices. The model implied relationship between unanticipated changes in real interest rates and real outputs over time is examined in a subsequent empirical study, which provides preliminary evidence consistent with the hypothesis of misintermediation.
ISSN:0164-0704
1873-152X
DOI:10.1016/j.jmacro.2017.05.001