Banks’ leverage behaviour in a two-agent new Keynesian model

Abstract

We study the distributive effects of a negative shock to banks assets in a saver-capitalist model. We analyze how this kind of heterogeneity affects macroeconomic variables and the distribution between savers and capitalists through banks leverage procyclicality. The distributive effects are non-favourable to savers and long lasting. Lower risk aversion of capitalists strengthens and lengthens the procyclicality of leverage, leading to a lower decrease of savers’ income and consumption. Whilst stricter regulatory requirements are favourable to savers, a tougher inflation targeting is unfavourable to savers. The model is robust to the combined introduction of labour market frictions and hysteresis, which together generate an amplification and lengthening of the recessionary and distributive effects unfavourable to savers.