The business cycle implications of banks' maturity transformation

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 19 March 2012

Working Paper No. 446
By Martin M Andreasen, Marcelo Ferman and Pawel Zabczyk

This paper develops a DSGE model in which banks use short-term deposits to provide firms with long-term credit. The demand for long-term credit arises because firms borrow in order to finance their capital stock which they only adjust at infrequent intervals. We show within a real business cycle framework that maturity transformation in the banking sector in general attenuates the output response to a technological shock. Implications of long-term nominal contracts are also examined in a New Keynesian version of the model, where we find that maturity transformation reduces the real effects of a monetary policy shock.

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